S&P/ASX 300 Index (ASX: XKO) share Adairs Ltd (ASX: ADH) could be one of the cheapest opportunities right now if it delivers on the forecast profit.
Adairs operates three different homewares and furniture businesses – Adairs, Mocka and Focus on Furniture. As we can see on the chart below, the Adairs share price is down 8% from 1 August 2024, 21% from 27 March 2024 and 57% from June 2021
It's understandable why the Adairs share price has fallen so far – many households have significantly less discretionary spending than they did during the COVID economic boom times of 2021.
Elevated interest rates and a higher cost of living are hurting demand for Adairs. But, profitability could get better for the company in FY25 and beyond.
Profit projected to increase
In FY21, the ASX 300 share made $76 million of net profit after tax (NPAT). NPAT is projected by UBS to have reduced to $36 million in the just-finished 2024 financial year amid the difficult circumstances.
However, Adairs is undertaking a big push to reduce costs, including its new national distribution centre coming under the company's control and (in UBS' words) "people cost savings" across in-store and the support office. Together, those two areas may have saved between $12 million and $14 million in FY24, split roughly evenly.
The Adairs brand earnings before interest and tax (EBIT) margin is expected to rise from 7.8% in FY24, to 9.9% in FY25 and then rise again to 10.6% in FY26.
The improving profit margins are expected to help Adairs' overall NPAT rise 22.2% in FY25 to $44 million. In FY26, NPAT could then rise another 18.1% to $52 million.
Earnings growth can encourage investors to pay for a higher earnings multiple than it's currently trading at.
Using UBS' estimates, the Adairs share price is valued at 9.8x FY24's estimated earnings, 8.2x FY25's estimated earnings and 6.9x FY26's estimated earnings.
Strong cash returns?
Adairs shares don't necessarily need to soar from here to deliver strong total returns.
With the ASX 300 share trading at such a low earnings multiple, it means any dividends paid can translate into a fairly high dividend yield.
The broker UBS has forecast that Adairs could decide on a healthy dividend payout ratio of 72% in FY25 and 70% in FY26.
At the current Adairs share price, those projected payouts are forecast to translate into grossed-up dividend yields of 12.5% and 14.6%.
Foolish takeaway
There are few ASX 300 shares that are expected to deliver such solid profit growth, while trading at such a low earnings multiple. I'm also hoping to see a strengthening of the balance sheet (particularly with its net debt) over the next two financial years.
As long as profit noticeably grows in FY25 and FY26, I think there's a very good chance the Adairs share price could deliver market-beating capital growth.
