ASX shares that hit 52-week lows may be opportunities if the market has been too harsh with them. But, it's also possible that they could just keep falling and hit more new lows.
Businesses that have been temporarily sold off may bounce back, particularly if the issue they are facing is a short-term problem.
It can be a dangerous play to try to choose businesses that have fallen because there's no rule that says they'll recover any time soon, if ever. Sometimes investors describe investing in these declining stocks as trying to catch "falling knives".
With that in mind, let's look at these two ASX shares and consider whether they're opportunities.
Centuria Office REIT (ASX: COF)
This is a real estate investment trust (REIT) which is Australia's largest pure-play office REIT, owning "high-quality office assets situated in core submarkets throughout Australia." Its goal is to provide investors with income and the opportunity for capital growth.
At the end of FY23, it had 23 assets reportedly worth $2.2 billion. As we can see on the chart below, the Centuria Office REIT share price has fallen by 20% in the past year.
There has been a lot of uncertainty surrounding office REITs – not only are higher interest rates challenging property valuations and increasing interest costs but there also has been a sizeable shift to working from home, leading to plenty of tenants requiring less office floor area.
Despite that, the Centuria Office REIT had an occupancy (by gross income) rate of 97.1% in FY23, up from 94.7% in FY22. It also had a weighted average lease expiry (WALE) of 4.2 years, so it still has plenty of income locked in, with good medium-term visibility of that income.
It noted in its FY23 result that after portfolio revaluations, its overall portfolio value fell 4.4% from 31 December 2022. This led to its net tangible assets (NTA) per unit being $2.20. So the current Centuria Office REIT share price is at a 44% discount to this.
The weighted average capitalisation rate (WACR) of the ASX share is now 6%, which is a fairly high net rental return for its assets.
In FY24, it has guided that the distribution per unit will be 12 cents. That's a distribution yield of 9.7%!
I think it'd be fair to say the stated property values can fall further from here, but the rental profit that it's making is real, and the distribution yield for FY24 seems huge. It's not the sort of investment I'd go for personally, or normally cover, but it does seem oversold and could be a very contrarian idea.
KMD Brands Ltd (ASX: KMD)
This is a retailing business that sells through three different brands – Kathmandu, Oboz and Rip Curl.
The KMD share price has fallen around 20% in the last year and it has halved from November 2021, as we can see on the chart below.
It's understandable why the business is seeing struggles. In mid-July 2023 it said that recent trading in the fourth quarter had been "more challenging, with increased cost-of-living pressures softening consumer sentiment."
As a retailer, it needs to sell items to customers to make a profit. A build-up of stock for a retailer can be terrible because it may lead to necessary elevated discounting to normalise inventory.
The company said in its trading update that Kathmandu has "so far experienced a slower start to its winter trading period", and it is also cycling its best-ever winter season performance last year. The sales and retail foot traffic were "impacted by a warmer start to winter in Australia."
It's working on moderating its cost base, which should support the company's profitability during the upcoming period.
Based on Commsec estimates, the KMD share price is valued at 8 times FY25's estimated earnings with a possible FY25 dividend yield of 9.1%.
I think it's possible that both of these ASX shares could be opportunities if we look, say, two to three years down the line. I'd say that would be long enough for the retail outlook to be improving.
Strong ongoing distributions from Centuria Office REIT may help deliver outperformance, particularly if the value of office properties doesn't fall as much as the market is implying with its large NTA discount.