S&P/ASX 300 Index (ASX: XKO) shares are a great place to look for undervalued opportunities.
Analysts closely monitor the big end of the ASX share market, like Commonwealth Bank of Australia (ASX: CBA) and CSL Ltd (ASX: CSL). According to Commsec, CBA and CSL each have 15 analyst ratings. It's less likely that ASX blue-chip shares will be undervalued if there are many analysts monitoring a business.
However, there are smaller ASX 300 shares out there with a lot fewer (or zero) analysts covering them. I believe we can find 'steals' the more we look down the market capitalisation list.
The two stocks I'll talk about below are facing challenges, but their valuations look appealing for the long-term. Let's dive into the ideas.
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Collins Foods Ltd (ASX: CKF)
This company is best known as a large KFC franchisee business with operations in Australia and Europe. It also operates a relatively small network of Taco Bells in Australia.
The chart below shows that Collins Foods' share price has dropped more than 38% this year. I believe this decline opens up an appealing opportunity to be a contrarian investor.
Collins Foods' FY25 half-year result demonstrated the problems it's facing. While revenue rose 1.2% to $703.5 million, underlying net profit declined 23.8% to $23.7 million. Profit margins were impacted by continued wage, energy and input cost inflation, as well as higher depreciation charges due to a larger restaurant footprint.
A few factors make me optimistic that the ASX 300 share's net profit can rise in future years.
First, Collins Foods can continue expanding its KFC network to grow sales and profit. In the HY25 result announcement, the company said it expects to open seven more stores over the rest of FY25, with three more locations in Australia and four in the Netherlands.
Second, the company's cost inflation problems could subside. The latest ABS inflation reading for the three months to September 2024 showed annual CPI inflation of just 2.8%. Annual inflation has reduced significantly compared to the last couple of years, which I think bodes well for slower cost growth for the ASX 300 share.
Third, the valuation looks very cheap if profit growth returns. Broker UBS is forecasting a profit decline in FY25, with earnings per share (EPS) predicted to fall to 37 cents. However, EPS is then forecast to rebound to 54 cents in FY26 and 66 cents in FY27.
The UBS projection puts the current Collins Foods share price at 14x FY25's estimated earnings.
Charter Hall Social Infrastructure REIT (ASX: CQE)
Most real estate investment trusts (REITs) have gone through pain over the past two years as interest rates soared. First, the cost of debt increased, hurting rental profits. Second, higher rates were a headwind for commercial property values.
However, with interest rates seemingly at their peak, the RBA's next move looks like a cut. It could be fruitful to look at some REITs, like Charter Hall Social Infrastructure, which has suffered.
The Charter Hall Social Infrastructure REIT share price has declined 36% between December 2021 and today, as the chart above shows. That's despite the business having a solid property portfolio largely focused on childcare centres, with some exposure to other tenant industries, including healthcare, life sciences, and emergency services.
All of the ASX 300 share's operational properties were independently valued as of 30 June 2024, helping the REIT to report net tangible assets (NTA) (an underlying value) per unit of $3.82. The Charter Hall Social Infrastructure REIT share price is sitting at a discount of just over 30% to its NTA.
The business has impressive portfolio metrics, which I believe justifies narrowing the NTA discount in 2025. At the end of FY24, it reported having a long weighted average lease expiry (WALE) of 12.4 years, which is appealing for the visibility of future rental income.
Another positive is that rental income continues to grow—in FY24, it achieved an average rental increase of 3.4%. In FY25, the REIT expects two-thirds of its rental income to experience a fixed average increase of 3%, with the other third seeing a mix of CPI-linked increases and market-linked reviews.
It expects to pay a 5.7% distribution yield in FY25, which I'd consider a decent return by itself. If the NTA discount narrows, this ASX 300 share could outperform the ASX share market return.
