The ASX small-cap stock Eureka Group Holdings Ltd (ASX: EGH) looks like a great buy because of its valuation, the outlook, and the RBA.
Eureka is a business focused on providing quality and affordable rental accommodation for independent seniors and disability pensioners within a comfortable community environment. There are no entry or exit fees.
It has more than 50 villages across six states, with more than 2,800 units owned or managed across Australia.
There are a few reasons why I think the ASX small-cap stock is a bargain. Let's get into it.
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Rising earnings
The business notes that more than 95% of Eureka's senior residents receive government support payments, which are indexed biannually by at least the rate of CPI inflation.
Eureka also recently expanded into all-aged rental communities, and it can use its experience in the over-50s market to succeed in this area. The company notes that many regional communities have very limited rental accommodation available. 'Ingoing yields' are reportedly between 8% and 10%, and the targeted five-year internal rate of return (IRR) is more than 15%.
The ASX small-cap stock pointed out that demand for rental accommodation remains very high, driven by strong levels of immigration and overseas students, an ageing population, housing affordability concerns, and limited supply. Across Australia, the vacancy rate for residential accommodation was 1.2% as at 30 September 2024. Eureka says that a 3% vacancy rate is considered a 'balanced' market.
In the FY25 first-half result, the business reported revenue growth of 11%, driven by strong resident demand, rental growth, and acquisitions. I expect the business will continue to make acquisitions to help drive earnings in the coming years. HY25 operating profit (EBITDA) grew 16% to $8.2 million, while underlying profit before tax increased 25% to $5.4 million.
RBA rate cuts to help the ASX small-cap stock?
As a property-focused business, I believe the recent RBA rate cuts and potential future ones could help drive the underlying value of the ASX small-cap stock.
The business can also benefit from a reduction in the cost of debt, which would boost the company's operating profits.
Some economists think the RBA could cut interest rates by a further three or four times over the next 12 months. I think that would be very supportive for the ASX small-cap stock.
Rising dividend
While it doesn't have a huge dividend yield, the business is in a good position to continue paying larger dividends to investors.
The ASX small-cap stock has increased its annual dividend each year since 2019, which is not something that many companies can say.
The last two dividend payments amount to a dividend yield of 2.5%. But, I'm expecting plenty more dividend growth from investors in the coming years.
