There are a lot of unloved ASX shares out there at the moment, but which ones are deserving of your investment?
The team at IML Australian Smaller Companies Fund had some ideas for a difficult time ahead.
"Rising interest rates will eventually lead to reduced consumer spending and lower demand, which will impact both business earnings and company valuations," its memo to clients read.
"We remain focused on investing in companies with predictable recurring revenues and strong market positions, which are likely to perform better in these times."
Here are two ASX shares that fit the bill for IML analysts at the moment:
'Stable, predictable cash flow'
Transport services company Kelsian Group Ltd (ASX: KLS) is not a name investors hear much of, but with a $1 billion market cap, the IML team reckons it can't be ignored.
In fact, IML has bought up Kelsian shares over the past quarter even as the stock price plunged.
"Kelsian is Australia's largest land and marine transport and tourism provider," the memo read.
"We remain attracted to Kelsian in a higher inflation environment as its main business comes from public bus transport which delivers stable, predictable cash flow, protected from cost pressures due to its government-backed contracts that deliver full recovery of cost increases."
The Kelsian share price has dropped a hair-raising 38% so far this year, and 30% since late August.
According to IML analysts, the valuation plummeted even though the reporting update was positive.
"The drop was due to concerns that the company may need to raise funds if its overseas acquisition plans are successful," read the memo.
"We took advantage of this weakness to increase our position in Kelsian after it became clear that it was not going to raise equity."
The recent discount means that it's now "reasonably priced on 13.5 times FY23 profit", added IML's notes.
Kelsian also pays out a tidy 3.6% dividend yield.
Keeping the faith in this challenger
Telecommunications provider TPG Telecom Ltd (ASX: TPG) has been frustrating to own ever since it floated in mid-2020 after its birth from the Vodafone-TPG merger. The share price has almost halved from where it started.
It's been no picnic in recent times either, dropping more than 31% since mid-August.
"Its shares fell sharply over the quarter due to a weaker than expected first half result," read the IML memo.
"The soft result took the market by surprise after an upbeat investor day in June, with mobile trends notably weaker than peers Telstra Corporation Ltd (ASX: TLS) and Optus in the June quarter."
Despite all this drama, the IML team is convinced TPG will head upwards in the long term.
"We remain attracted to TPG given the defensive and recurring nature of its earnings," read the memo.
"Going forward, earnings should benefit from increasing immigration and tourism, which will help grow the number of mobile subscribers, as well as the proposed regional network sharing agreement with Telstra, and the migration of some NBN broadband customers to TPG's fixed wireless network."
TPG shares currently boast a dividend yield of 3.9%.
