2 ASX shares I think are absurdly cheap buys right now

These unloved stocks could be contrarian opportunities.

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It's fair to say that the ASX share market has seen some pain in recent times, particularly in certain pockets. Hence, these declines may have created cheap buying opportunities for contrarian investors.

Just because something has fallen heavily doesn't mean that a recovery is going to happen. However, it's possible that the market can become overly pessimistic about businesses, especially when there's no sign of when things will turn around.

The two ASX shares I'm going to talk about are certainly higher risk than a blue chip, but the low valuation could mean they're a better opportunity than they seem.

Adore Beauty Group Ltd (ASX: ABY)

Former COVID-19 winner Adore Beauty is a leading online retailer of beauty products in Australia. It says that it has evolved into an "integrated content, marketing and e-commerce retail platform", with over 270 brands and more than 12,000 products.

Perhaps unsurprisingly, the company's revenue has fallen back following tighter economic conditions, as well as the end of lockdowns and retail restrictions. The Adore Beauty share price has fallen over 80% from January 2022.

FY23 revenue declined 9.6% to $180.6 million and active customers fell 8% to 801,000.

But, there were a few small positives in the FY23 result that makes me think the longer term can be very positive for the business.

First, revenue returned to growth in the second half of FY23, with a rise of 0.5% despite the challenging conditions. Positive sales growth continued into FY24, with year-to-date revenue growth of 5.9%.

Second, returning customers increased by 4% year over year to a record high of 490,000 in FY23, contributing 76% of all revenue.

It made positive earnings before interest, tax, depreciation and amortisation (EBITDA) of $0.6 million, with an EBITDA margin of 0.4%. That's not as high as we'd like to see, but it's a good sign that the ASX share is still making a profit at the EBITDA level. Growing revenue (if that continues) will be able to help profitability. It's also seeing early benefits of cost and margin initiatives, with improvements in the "gross profit margin, marketing efficiencies and employee costs".

In the longer term, I think there's potential for the business to continue to increase the percentage of sales done on its mobile app. In FY23, it also tripled its number of private label products and has plans for further expansion, which could lead to stronger margins from those sales.

In FY24, it's expecting an EBITDA margin of between 2% to 4%, which would be a sizeable improvement. In the longer term, I think more shoppers may buy more products online, which will hopefully be a tailwind for the ASX share.

Centuria Office REIT (ASX: COF)

The office sector of the property/real estate investment trust (REIT) market is facing a lot of uncertainty. The work-from-home shift has changed the game and lowered demand. Higher interest rates should hurt the value of properties.

Since 21 February 2020, the Centuria Office REIT share price is down 65%. Since April 2022 it's down around 50%.

I certainly think that the book value, or net asset value (NAV), of Centuria Office REIT, is likely to fall in the medium term from where it finished FY23 at $2.20 per unit. Of course, the question is – how much will it fall? The share price may have overcompensated.

It has some good portfolio statistics – in FY23 its portfolio occupancy was 97.1%, with a weighted average lease expiry (WALE) of 4.2 years.

Let's just look at the actual numbers that the business is expecting to generate in FY24, which could support the Centuria Office REIT share price. It's forecasting funds from operations (FFO), being net rental profit, of 13.8 cents per unit. That means the business is trading at just 8x the rental profit.

The distribution guidance is 12 cents per unit for FY24, which is a forward distribution yield of 10.6%. If we just use the income this ASX share could send out as a barometer of its underlying value, it could be undervalued.

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. has recommended Adore Beauty Group. The Motley Fool Australia has recommended Adore Beauty Group. 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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