2 cheap ASX shares that value investors could love

Adairs is one of the cheap ASX shares that could be a long-term opportunity.

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Key points

  • Adairs and Dusk are seeing share price falls, but could be cheap ASX shares to consider
  • Adairs is a leading furniture and homewares retailer, with several strategies for long-term earnings growth
  • Dusk is a leading fragrance retailer which has a growing store network, it’s expanding its operations after the Eroma acquisition

Value investors may like the cheap ASX shares that are discussed below.

Cheap companies may not always be the best value. However, there are some that may offer long-term growth potential, a low price/earnings ratio and a high dividend yield. That combination of factors could be useful for shareholders over time.

With that in mind, it might be a good time to consider these two ASX stocks during this volatility:

Adairs Ltd (ASX: ADH)

Adairs is a retail company that sells a wide array of homewares and furnishings, as well as furniture through Mocka and Focus on Furniture.

After a troublesome trading update for the first half of FY22, the Adairs share price has dropped 22%. However, whilst profitability was hit by store closures and supply chain problems, the business also reported increased sales.

Group like-for-like sales were up 2.7%, adjusting for store closures and excluding Focus. Overall group online sales, excluding Focus, were up 8.2% to $97.6 million, representing 42.5% of group sales. Adairs’ online sales went up 1.6% and Mocka’s sales grew 22.8%.

Management is confident about the longer-term growth prospects of the cheap ASX share with the commissioning of its new national distribution centre, upsizing selected stores, continual expansion of its range, and adding to omnichannel capabilities.

Focus has seen good trading, with $12.5 million of sales, including $1.6 million from its online channel.

Underlying earnings before interest and tax (EBIT) is expected to be between $32 to $33 million in HY22, compared to $22.6 million in HY20 and $60.2 million in HY21.

While Commsec’s forecasts may adjust after this update, the FY24 projection (which starts a year and a half away) suggests the Adairs share price is valued at 6x FY24’s estimated earnings with a potential grossed-up dividend yield of 16% for FY24.

Dusk Group Ltd (ASX: DSK)

Dusk is another retail business that has provided a trading update but could be a long-term opportunity.

For readers that don’t know what Dusk does, it sells home fragrance products – candles, ultrasonic diffusers, reed diffusers and essential oils, as well as fragrance-related homewares.

Like plenty of other retailers, its trading update showed disruptions from store closures and COVID impacts. Its store network finished at 128 stores, an increase of six new stores.

Whilst store sales were down 12% to $80 million year on year, it was an increase from $58.6 million in the first half of FY20. Online sales were up 4.3%, after cycling growth of 120%.

The cheap ASX share’s pro forma gross profit margin increased from 67.7% to 68%. Dusk notes that the acquisition of Eroma has continued to trade well and is expected to be a strong contributor in both profit and earnings per share (EPS) terms in the first full year of ownership.

Eroma is a leading supplier of candle making inputs, including fragrance oils, waxes, packaging, containers, and candle making kits. The enterprise value was $28 million. Pro forma EPS accretion in year one is expected to be 20%, before synergies.

Over the last six months, the Dusk share price has fallen 25%. Commsec puts Dusk shares at under 7x FY24’s estimated earnings with a possible FY24 grossed-up dividend yield of 14.8%.

Should you invest $1,000 in Dusk right now?

Before you consider Dusk, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Dusk wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of January 13th 2022

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended ADAIRS FPO. The Motley Fool Australia owns and has recommended ADAIRS FPO. The Motley Fool Australia has recommended Dusk Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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