Buy this cheap ASX 300 stock for a 26% return

Analysts expect big returns from this undervalued stock.

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Investors who are looking for a combination of gains and dividends may want to check out Rural Funds Group (ASX: RFF).

That's because the team at Bell Potter believes the ASX 300 stock could be significantly undervalued at current levels.

What is this ASX 300 stock?

Firstly, if you're not familiar with Rural Funds, let's take a quick look at its business.

It is a real estate property trust that owns a diversified portfolio of Australian agricultural assets. It generates revenue from the leasing of almond orchards, macadamia orchards, poultry property and infrastructure, vineyards, cattle properties, cropping properties, agricultural plant and equipment, cattle, and water rights.

Given that demand for agricultural property is always in demand, this makes the ASX 300 stock a defensive option for investors. Particularly given its long tenancy agreements and built-in rental increases.

At the last count, Rural Funds had a weighted average lease expiry (WALE) of 12.8 years, with leases predominantly on a triple-net structure.

Furthermore, its portfolio is leased out to quality tenants. Management notes that ~80% of FY 2024 income is coming from corporate and listed lessees. This includes JBS, Select Harvests Ltd (ASX: SHV), Stone Axe, and Treasury Wine Estates Ltd (ASX: TWE).

Why is it a buy?

According to a recent note, Bell Potter believes that its shares are too cheap at current levels to ignore. It highlights the significant discount to net asset value (NAV) that the ASX 300 stock is trading at. The broker said:

The ~30% [now 35%] discount to market NAV appears excessive when we consider the material improvement in counterparty profitability indicators in recent months (with cattle, almond and macadamia nut prices all rallying off the lows) and that we are likely to see asset sales at or around the market value of the assets.

Bell Potter currently has a buy rating and a $2.40 price target on Rural Funds' shares. Based on its current share price of $2.00, this implies a potential upside of 20% for investors over the next 12 months.

But the returns won't stop there. Rural Funds is one of the more generous dividend payers on the Australian share market.

Bell Potter expects this to remain the case for the foreseeable future and is forecasting distributions of 11.7 cents per share in FY 2024, 11.7 cents per share in FY 2025, and 12.2 cents per share in FY 2026. This equates to dividend yields of 5.85%, 5.85%, and 6.1%, respectively.

Overall, this means that a total return of 26% could be on the cards for investors between now and this time next year.

Motley Fool contributor James Mickleboro has positions in Treasury Wine Estates. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Rural Funds Group. The Motley Fool Australia has recommended Treasury Wine Estates. 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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