Top 5 ASX Undervalued Stocks for 2023

Despite the ongoing pandemic and economic uncertainty, Australian shares delivered double-digit gains in 2021.

We believe that the equity markets in Australia comprise many smart professionals with good access to information. Consequently, most companies are usually valued fairly, leaving a minimal margin of safety for the investors to invest.

However, there are still few companies, albeit a minority, whose share price rise or fall distinctly from overall markets, making a divergence from their fair/intrinsic value. If this leads to a stock price below its fair/intrinsic value, we consider them undervalued. These stocks usually are characterized by lower valuation metrics, such as lower Price to EPS (PE) ratio.

The undervalued stocks generally have lower valuations; however, not all lower valuation stocks are a great value buy. It is critical to understand the reason behind the lower valuations, which could be diminishing prospects of the company’s growth or increasing competition leading to lower market share. If these are the reasons for the lower valuation, they are not considered undervalued.

Let’s understand a few of the common reasons that lead to a decrease in share price and stock to be undervalued:

• Changes to the market: It When a negative event that comes as a surprise (Black Swan event) occurs, it changes the overall market sentiments, and markets crash which can provide a good buy opportunity to the investors with huge upside potential. For instance, in March 2020, when global lockdown due to the pandemic occurred, the stock markets crashed and made multi-year lows. If looked behind, that was a great buy opportunity for the investors.
• Negative news: It When investors overreact to negative news related to the industry or the company, the stock price falls beyond the fair value. Though this can be temporary, it provides a fresh entry point to new investors and an additional opportunity for the existing investors.
• Unexpected financial results: It Similar to the negative news, below expected financial results can lead to a significant fall in share price. Though sometimes this kind of fall is justified, a few times investors overreact, providing new opportunities.
• Negative industry sentiments It Many times, investors turn negative on an industry, which is justified if the business model is not sustainable in new age times or due to tighter regulations. However, sometimes investors can get their stakes out of industry stocks due to a change in preference (to the new industry), leading to a fall in share price. Interestingly, there may not be any significant change in underlying fundamentals, giving an opportunity to buy.

Given that the undervalued stocks exist and provide a good opportunity to buy, we’ll look at the best-undervalued shares to buy in 2022 on the ASX. We have created a list of stocks with strong potential to grow and are not priced fairly. We believe that the technology growth stocks have been overvalued now, and undervalued mining, energy, and investment management stocks should provide better returns to the investors in 2022.

1. BHP Group Limited (BHP):

The company was formerly known as BHP Billiton Limited, and it is the world’s biggest miner. The company produces various commodities, including copper and uranium, copper smelter, copper refinery, and precious metals. Additionally, the company has a substantial interest in oil and gas. On 15^th Feb 2022, the company announced the half-year results and declared a record dividend of USD 7.6 billion, which translates to USD 1.50 per share and a payout ratio of 78%.

A payout ratio of 78%, along with a 144% YOY increase in basic EPS (1H22: 186.6 per share, 1H22: 76.6), is considered very positive. The company reported strong results despite the reduced demand from the top metal consumer, China, which intends to curb emissions. The company returned USD 22 billion to the shareholders in the last 18 months.

Additionally, the company’s PE stands at 11.3x, against the Australian Metals and Mining industry average of 14.5x, indicating that the stock is undervalued. Furthermore, an increase in global commodity prices amid geopolitical tension should aid well for the company. The current market cap of the BHP group stands at AUD 245.4 billion.

2. NextGen Energy (NIM):

The company is an exploration and development stage company. The company focuses on the acquisition, exploration, and development of Canadian uranium projects. Uranium remains one of the critical commodities as it provides 10% of the world’s total electricity. The company is also listed on TSX and NYSE, giving them access to North American markets, which remains an additional advantage over the competitors, Paladin and Energy Resources of Australia.

NXN’s share price has a strong correlation with the uranium price. The commodity’s price increased to USD 50.61/Lbs on 17^th Sep 2021 from USD 30.4/Lbs on 16^th Aug 2021, indicating a jump of 66.5%. During the same period, NXN’s share price jumped 50.9%. Similar price-performance was seen since 9^th Feb 2022, where both increased ~35%. Interestingly, the current Uranium price is ~USD 60.00 per Lbs, and twin tailwinds of geopolitical tension and climate change could push the price towards its previous peak of around USD 148 per Lbs in 2007. If the commodity price surpasses its previous peak, the share price should increase beyond AUD 16 per share, indicating more than 100% upside potential.

3. Pinnacle Investment Management Group Limited (PNI):

The company operates as an investment management company in Australia. Recently, all listed asset management companies witnessed sell-off, and PNI was not an exception to this. Surprisingly, despite a strong set of first-half results, the share price decreased ~13% to AUD 9.47 since the announcement on 3^rd Feb 2022. During the first half of FY22, Net profit after tax (NPAT) increased 32% to AUD 40.1 million, while dividend per share grew 50% to 17.50 cents per share. As of 31^st Dec 2021, aggregate affiliates’ funds under management (FUM) stood at AUD 93.6 billion.

We have selected Pinnacle due to consistent inflows, which its affiliates achieve, along with the diversified range of asset managers it has, across Australian equities, global equities, bonds, credit, real estates (property), and private asset markets. The company’s FUM grew at a CAGR of ~26% over the last ten years (24.5% excluding AUD 6.8 billion acquired in Jul 2018, AUD 3.0 billion acquired in Dec 2019, and AUD 1.1 billion acquired in Dec 2021).

4. GQG Partners (GQG):

GQG is an investment management firm focused on global and emerging markets equities. The company was the ASX’s largest IPO in 2021, raising AUD 1.2 billion on an initial AUD 5.9 billion market cap. The IPO valued its shares at AUD 2 per share; however, it is currently trading at AUD 1.28, a discount of ~64%. A team at Goldman Sachs saw this fall as an opportunity to invest and valued the company at AUD 2.45 per share, indicating an upside potential of ~91.4%.

The analysts valued the stock at 11.8x NTM EV/EBITDA multiple to arrive at the valuation of AUD 2.45; however, the stock could be re-rated to even 13.1x if the company manages to maintain strong organic growth. Additionally, the Morgans analyst Scott Murdoch held the view on the stock as ‘sector recommendation’ with an ‘attractive valuation relative to flows momentum, earnings quality, and growth potential.’

Separately, the point is noteworthy that the company’s co-founders have their skin in the game as the majority of their net wealth is invested in GQG and its investment strategies. Furthermore, over time, the company aims for every one of its employees to be a shareholder in GQG and exposed to at least one of GQG’s investment strategies.

With USD 91.3 billion under management, up from USD 85.8 billion in September, the company invests in active equity portfolios. The company’s management believed that the technology is no longer the next growth spot, and they are now focused on base metals, utilities, and healthcare. The company is also investing heavily in emerging markets, including China.

5. Nickel Mines (NIC):

The company is focused on producing nickel pig iron (NPI), with principal operations located in Central Sulawesi, Indonesia, are the Hengjaya Nickel and Ranger Nickel rotary kiln electric furnace (RKEF) projects located within the Indonesia Morowali Industrial Park (IMIP) and the Hengjaya mine. Given that Russia is the 3rd largest exporter of nickel globally, and with supply disrupted and growing demand for nickel from battery manufacturers, we expect higher nickel prices to sustain, which should aid well for NIC. Nickel Mines is set to triple production over the next 12 months.

Interestingly, on the 1^st March 2022, Weifeng Huang, Non-Executive Director at NIC, bought around 120k shares on-market at ~AUD 1.52 per share, taking the total count to AUD 895k. Insiders have collectively bought AUD 5.7 million more in shares than they have sold in the last 12 months.

The company was valued at AUD 2.60 per share using the 2 Stage Free Cash Flow to the Equity method. The valuation indicates an upside potential of ~117% compared to the current market price of AUD 1.20 per share.

At this point, when the markets are seeing recovery, it is worth looking for the stocks that have the potential to perform well in future.

Check out our latest article - Top ASX stocks to watch in 2022.

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