Investing in S&P/ASX 300 Index (ASX: XKO) stocks could make sense at 52-week lows if there's a good chance their underlying value could recover in the coming months and years.
I believe that Rural Funds Group (ASX: RFF), a farmland real estate investment trust (REIT), fits into that category.
It hit a 52-week low of $1.62 on Friday, 24 January.
The last few years of higher interest rates have taken their toll on the REIT sector. High interest rates are a headwind for rental profits and also hurt property values.
There are reports that national farm values have declined recently, which isn't good news for Rural Funds if the value of its own farms also declined in the first half of FY25. However, the decline of almost 50% since January 2022 gives a large margin of safety to invest for the long term.
Growing rental profits
It's hard to judge the true underlying value of Rural Funds shares in the current environment, so I think it's better to look at what's going on with the rental profit and passive income.
Firstly, the business continues to benefit from rental growth. Most of its tenants are on contracts that have rental growth linked to either fixed annual increases or the indexation is linked to inflation, combined with occasional market reviews.
This is a useful driver for the ASX 300 stock's overall rental profit. Despite higher rates, Rural Funds is expecting to grow its adjusted funds from operations (AFFO – rental profit) per unit by 3.6% in FY25 to 11.4 cents per unit.
At the current Rural Funds share price, it's trading at 14x its projected rental profit.
Solid distribution
The ASX 300 stock's distribution is supported by its portfolio of various farms, including cattle, vineyards, almonds, macadamias, and cropping. I think it's a good thing because diversification means its cash flow isn't reliant on one particular commodity.
Rural Funds hasn't cut its distribution since it listed over a decade ago, and impressively, it increased its payout each year between 2014 to 2022.
The business has guided its distribution will be 11.73 cents per unit in FY25, which currently suggests a distribution yield of 7%.
Falling rates to help?
I don't know when interest rates are going to fall in Australia, particularly with ongoing changes globally that could help or hinder the fight against inflation.
However, I do think it's possible that interest rates could come down in the next few months with the RBA starting to see progress on inflation in Australia.
I believe Rural Funds could significantly benefit from an interest rate cut, with both the rental profit and underlying farm values likely to benefit. Hence, I think this is probably the right time to look at the ASX 300 stock.
