The share Rural Funds Group (ASX: RFF) looks like an excellent ASX stock to buy to me because it's significantly undervalued.
Rural Funds is a real estate investment trust (REIT) that owns farmland across a number of sectors including cattle, almonds, macadamias, vineyards and cropping.
In a period when the RBA interest rate has increased multiple times, I think the market is underappreciating the business, presenting an opportunity to invest.
Let's take a look at why I'm so interested in investing.
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Significant discount
One of the main ways to value a REIT is to look at the net asset value (NAV) – that includes the value of property, the debt, the cash and so on. Rural Funds regularly reports its adjusted NAV to take into account the market value of its water entitlements.
If the unit price of the REIT is significantly below the NAV, then that means we can buy exposure to its portfolio of assets at a compelling discount.
Rural Funds reported that its adjusted NAV was $3.22 at the end of FY26, representing a 4.5% year-over-year increase, driven by property revaluations and the value of its interest rate swaps.
We'd have to pay a lot more to go and buy the farms today in our own names. With Rural Funds, we can buy exposure at a much lower price.
Currently, the Rural Funds unit price is trading at a 35% discount to its stated value.
Resilient distribution
Even if the market doesn't recognise the value of the business by sending the Rural Funds unit price higher any time soon, we can benefit by getting a sizeable distribution yield. The yield is much larger now than it would be if the Rural Funds unit price was trading at parity with its adjusted NAV.
Its distribution history is pleasing. Rural Funds grew its distribution every year between FY14 and FY22 and has since been maintained despite higher interest rates.
The business has provided guidance that it will pay an annual distribution of 11.73 cents per unit again in FY27, representing a distribution payout ratio of 100%.
At that level, it offers a distribution yield of 5.6%.
I think the business can deliver rising payouts in the coming years because of the ASX stock's organic rental growth.
Pleasing rental income
I think every business worth investing in needs to have organic drivers that can increase its value over time.
There are two aspects that are helping increase its rental income.
More than half of its rental income is linked to CPI inflation, while another 29% is growing annually at a fixed rate. Regular rental growth is a compelling element, in my opinion.
Another driver is development investing at the farms. Some of the investments help increase the productivity of the farm, while other investments are turning some farms to other crop types for better, more economic use.
I think Rural Funds will pay larger dividends in the coming years.
