The ASX small-cap stock Dexus Convenience Retail REIT (ASX: DXC) looks like a very undervalued business to me.
For investors that haven't heard of this one, it's a real estate investment trust (REIT) with a market capitalisation of $406 million, according to the ASX. It owns a portfolio of high-quality Australian service stations and convenience retail assets.
The ASX small cap stock's portfolio of assets is predominantly located on Australia's eastern seaboard and leased to leading Australian and international convenience retail tenants.
Attractive yield
When a business is priced too cheaply by the market, it can mean investors are able to receive a very attractive distribution/dividend yield. The lower the share price, the higher the yield.
The ASX small-cap stock has provided guidance that it's going to pay a distribution of 20.6 cents per security. At the current Dexus Convenience Retail REIT unit price, it's expecting to pay a distribution yield of approximately 7%. I think that's a solid return before even considering the potential capital growth the business could achieve in the medium-term.
Impressive portfolio characteristics
The business has its tenants on long-term leases with contracted annual rental increases, which I think are both very positive in this uncertain time.
In the FY25 half-year result, the ASX small-cap stock reported that portfolio occupancy remained strong at 99.4%. It also revealed a weighted average lease expiry (WALE) of 8.2 years, with 88% of income expiring in FY30 or beyond.
In terms of rental income, the business is seeing steady growth, which is a pleasing attribute for investors. In the HY25 report, the business reported like-for-like net property income growth of 2.8% and average rent reviews of 3.1%.
Considering rental characteristics, I think this ASX small-cap stock offers everything that I'd want to see.
Looks like a major bargain
Businesses like this one regularly tell investors what its underlying value is, with a financial figure called the net tangible assets (NTA). That includes the assets (like the property values and cash) and the liabilities (such as the loans).
The ASX small-cap stock reported that its NTA as of 31 December 2024 was $3.57. That means at the current Dexus Convenience Retail REIT unit price, it's trading at a large 16% discount.
With more interest rate cuts seemingly on the way, I think that could lead to the NTA discount narrowing, the property values rising, a reduction in interest costs (helping rental profits) and a boost to the distribution.
I believe there are several factors that could combine to enable this business to outperform the market over the next two to three years.
