The ASX stock that’s ‘too cheap’

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In turbulent times like now, it’s not easy to find ASX stocks to buy that won’t undermine your confidence.

So it pays to listen when an expert has so much conviction in a particular stock that they’re willing to predict a 45% return over the next year.

And that’s exactly the affection Nathan Lead, principal analyst at Morgans, has for Silk Logistics Holdings Ltd (ASX: SLH), which it rates as a definite “add-on”.

“We think the stock is too cheap – around five times EV/EBITDA, around 12 times the P/E ratio (FY22F) – given its potential double-digit earnings growth and growth options.”

Recent Catalyst

Lead liked last week’s result of Silk Logistics’ NSW property novation.

“The NSW property novation has Silk transferring the cost of purchasing the land and the risk of developing the warehouse from its Kemps Creek site to the developer (ESR Australia) in exchange for a 10-year lease for purpose-built warehouses,” he said.

“Conditions precedent to the lease agreement include ESR’s acquisition of the site land and adjacent land, as well as planning, construction and development approvals.”

The contract can be terminated if the cost of construction exceeds a predefined level, which is a practical hedge against inflation.

According to Lead, the deal means Silk Logisitcs receives $13.5 million in upfront cash and approximately $29 million in rental incentives spread over three tranches.

“We believe that the rent under the lease agreement is similar to what Silk is paying at its current NSW sites which it intended to consolidate at Kemps Creek, and that the expiry of these existing site leases corresponds closely to the expected start of the new lease. ,” he said.

“Silk’s strategy is to retain its existing locations and seek to fill the Kemps Creek warehouse with new business.”

The analyst calculated the move to be 31 cents per share accretive to net present value including incentives and $2 million per year of incremental cash flow over the 10 years.

better than expected

Lead explained that it all turned out to be much more appealing than his team had previously anticipated.

“We only assumed $10 million in cash revenue from the lease in FY22,” he said.

“Projected free cash flow for fiscal years 23-25F is $17 million higher in total than we had previously forecast.”

In addition to the positive financial impact, the agreement provides additional warehousing capacity that Silk Logistics can use for growth.

Silk Logistics, for a stock that does not belong to the mining or banking sectors, has done quite well in 2022.

The stock price is up 13% year-to-date, up nearly 24% since March 9.

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