2 undervalued ASX shares where headline issues mask underlying value
These two companies with moat may represent an opportunity for long-term investors.
Most investors self-identify as having a long-term orientation. But actions speak louder than words. The focus on short-term data continues to drive markets.
All companies go through difficult times and market overreactions can provide opportunities for long-term investors.
Bapcor (ASX: BAP) Earnings weakness exacerbated by management turmoil
We lower our fair value estimate for shares in narrow moat Bapcor by 9% to $7.30 per share. However, the shares have dropped significantly and are trading at close to a 40% discount to our fair value.
The retail business is taking longer to recover than expected, margins in wholesale are under pressure, and the “Better than Before” program has made things worse than before. Senior management instability has also brought unnecessary turmoil to a business already struggling to win over investors.
The company now expects second-half net profit to be lower than the first, with fiscal 2024 underlying net profit guidance of $93 million to $97 million. We lower our fiscal 2024 net profit after tax forecast by 20% to $96 million—a 23% decline from fiscal 2023. It appears the recovery is going to take longer than we previously anticipated. We lower our fiscal 2025 net profit after taxes (“NPAT”) forecast by 20% to $123 million—marginally below fiscal 2023 NPAT.
The uncertainty of who will steer Bapcor back to growth is exacerbating earnings weakness. Paul Dumbrell was set to take the helm from May 1, 2024, following the departure of the previous CEO, Noel Meehan. But at the eleventh hour, Dumbrell decided not to join—with little detail on why. A new search for a permanent CEO begins.
Despite management turnover, we continue to think Bapcor’s strategy and competitive position remain intact, including its narrow economic moat. We expect continued share gains in trade as Bapcor’s network flexes its competitive advantages across the diverse fleet of vehicles on Australian roads. Bapcor can provide a broader range of (often slow-moving) parts in a timelier manner than smaller competitors.
We think the share price fall of over 20% is a severe overreaction to the trading update, presenting an opportunity to be greedy when others are fearful. Despite the near-term volatility, the underlying dynamics in automotive spare parts remain positive, and we expect consumer demand for discretionary goods to revert to trend levels in the longer term.
Endeavour (ASX: EDV): Weak sales momentum masks relative outperformance
Some of wide-moat Endeavour’s customers are struggling, and sales growth is below our long-term trend estimate. An earlier Easter break supported group sales of 2% in the third quarter of fiscal 2024. Normalizing for the Easter boost, group sales of only 1% are tracking with our muted fiscal 2024 forecast.
In the June quarter, sales growth is still hovering at around 1%. However, we expect consumer demand for discretionary items to pick up in fiscal 2025, including liquor, out-of-home meals, and entertainment. Key drivers are wage growth, meaningful tax cuts, and potential interest rate cuts. For more details on near-term drivers for the retailing sector, please refer to our Retailing Industry Pulse published on March 26, 2024.
For fiscal 2024, we expect group sales to increase by 2% before momentum recovers, with tax cuts taking effect from early fiscal 2025. Adjusted for an additional trading week in fiscal 2024, we forecast group sales to increase by 6%. Our long-term average sales growth forecast is unchanged at 4% per year.
Consumers are buying less frequently and trading down. For example, following supplier-led price hikes, French champagne is less in vogue, with sparkling wine substituting. However, not all cohorts are experiencing the same cost-of-living pressures.
The baby boomer generation and consumers without meaningful mortgage or rental obligations spend more freely, while others have reined in unnecessary expenses. Endeavour’s largest liquor competitor, Coles, paints a similar picture.
While Endeavour increased its liquor retail sales by 2% in the quarter, Coles’ liquor declined by 2% in the March quarter—both figures unadjusted for Easter. We infer Endeavour is taking market share, underpinned by the low price perception its Dan Murphy’s brand has with consumers.
Shares trade at a 14% discount to our unchanged $6.10 fair value estimate despite our relatively cautious view on the medium-term outlook for its hotels segment.