45% return in a year: The ASX share that's 'too cheap'

It's a pretty confusing time to buy shares, but one particular stock has this analyst convinced of juicy returns.

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In turbulent times like now, it's not easy to find ASX shares to buy that will not wreck your confidence.

So it pays to listen when an expert has so much conviction in a particular stock that they're willing to forecast a 45% return over the next year.

And that's exactly the affection Morgans senior analyst Nathan Lead holds for Silk Logistics Holdings Ltd (ASX: SLH), which he rates as a definite "add".

"We think the stock is too cheap — circa five times EV/EBITDA, circa 12 times P/E ratio (FY22F) — given its potential double-digit earnings growth and growth options."

Recent catalyst

Lead liked last week's result of Silk Logistics' NSW property novation.

"The NSW property novation has Silk transferring the land purchase cost and warehouse development risk of its Kemps Creek site to the developer (ESR Australia) in exchange for a 10-year lease for purpose-built warehouses," he said.

"Conditions precedent to the lease agreement include ESR acquiring the site land and adjacent land, as well as planning, building, and development approvals."

The contract can be terminated if the construction cost exceeds a preset level, which is a handy inflation protector.

According to Lead, the agreement means Silk Logisitcs receives $13.5 million cash upfront and about $29 million of lease incentives spread across three tranches.

"We believe that the rent under the lease agreement is similar to what Silk is paying across its current NSW sites that it intended to consolidate at Kemps Creek, and that expiry of these existing site leases is closely matched to the expected commencement of the new lease," he said.

"Silk's strategy is to retain its existing sites and seek to fill the Kemps Creek warehouse with new business."

The analyst calculated that this move is 31 cents per share net present value accretive, including the incentives and the $2 million per year incremental cash flow over the 10 years.

Better than expected

Lead explained that all this ended up far more attractive than what his team had previously forecast.

"We had assumed only $10 million of cash receipts from the lease deal in FY22," he said.

"Forecast net cash flow across FY23-25F is $17 million higher in aggregate than we had previously forecast."

As well as the positive financial impact, the deal supplies additional warehouse capacity that Silk Logistics can use for growth.

Silk Logistics, for a stock that's not in the mining or banking sectors, has done pretty well in 2022.

The share price is up 13% for the year so far, or almost 24% since 9 March.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Silk Logistics Holdings Limited. The Motley Fool Australia has recommended Silk Logistics Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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