Top fund manager reveals 2 undervalued ASX shares to buy

Here are two ASX shares that WAM likes in the WAM Research portfolio.

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Key points

  • WAM has revealed two ASX shares that are compelling in the WAM Research portfolio
  • Brickworks is a building products business with exposure to industrial property
  • Johns Lyng is a business that assists with rebuilding properties affected by damage

Leading fund manager Wilson Asset Management (WAM) has revealed two ASX shares that it rates as buys within its WAM Research Limited (ASX: WAX) portfolio.

WAM operates a few different listed investment companies (LICs).

One of the LICs is called WAM Research, which looks at smaller businesses on the ASX.

WAM describes WAM Research as an LIC that “invests in the most compelling undervalued growth opportunities in the Australian market”.

The WAM Research portfolio has delivered gross returns (that’s before fees, expenses, and taxes) of 15.3% per annum since the investment strategy changed in July 2010. This has been better than the All Ordinaries Total Accumulation Index (ASX: XAOA) return of 9.6% per annum.

These are the two undervalued ASX shares that WAM outlined in its most recent monthly update for WAM Research.

Brickworks Limited (ASX: BKW)

WAM explained that Brickworks manufactures a diverse range of building products across Australia and North America. It has 2,500 staff around the world.

The fund manager noted that in March, Brickworks announced a record half-year statutory net profit after tax (NPAT) of $581 million. This represented a 720% increase from the previous corresponding period, which beat market expectations.

The ASX share’s building material manufacturing division in Australia delivered a significant increase in earnings before interest and tax (EBIT) in the first half of FY22. It rose by 66% to $27 million. WAM said that sales momentum increased after COVID-19 lockdowns.

Wilson Asset Management believes the joint venture industrial property trust between Brickworks and Goodman Group (ASX: GMG) continues to be undervalued by the market “despite its sustained growth which has been fuelled by the accelerated industry trend towards e-commerce.”

The fund manager is positive on Brickworks, with expectations that further sales of land into the property trust will lead to a significant uplift in rental income, which “will continue to support double-digit earnings growth in this division”.

Johns Lyng Group Ltd (ASX: JLG)

The other ASX share that WAM named was the integrated building services business Johns Lyng, which has operations in Australia and the US. Its main businesses are based on rebuilding and restoring a variety of properties and contents after damage.

Last month, the business announced that it had been chosen to lead the New South Wales Government’s $142 million recovery response to the February and March flood events across the Eastern seaboard.

WAM believes this contract win will provide a tailwind of future earnings growth in Australia for the company, which has already been underpinned by a better-than-expected FY22 interim result.

The fund manager is still positive on Johns Lyng as it continues to grow with acquisitions that add to earnings in both Australia and the US.

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 Brickworks. The Motley Fool Australia owns and has recommended Brickworks. 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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