Undervalued Australian growth shares : Here are 4 of our favourites

Nick Sundich Nick Sundich, January 9, 2024

Undervalued Australian growth shares are difficult to find, but they are not impossible.

Stocks Down Under outlines how to look for Undervalued Australian growth shares and we name five of our favourite at the moment.

 

What undervalued Australian growth shares have in common

Undervalued Australian growth shares are undervalued for a reason.

Namely, because investors are uncertain about the company’s future prospects. This is not to say they think it’ll go belly up, but that it’ll struggle and fall short of past performance and/or the company’s own forecasts.

This may be because investors are uncertain about the state of the broader economy or the company’s sector.

Alternatively, the company may have endured a setback that leaves investors pessimistic.

Investors can make money from undervalued Australian growth shares when they have faith in such a company and the faith pays off.

The company overcomes the scepticism and doubts about its prospects and it performs well.

 

What are the Best undervalued Australian growth shares to invest in right now?

Check our buy/sell tips

 

 

How not to get burnt

This being said, sometimes investors can suffer losses on companies. The issues causing the company to fall in the first place may persist, or investors just may not be interested in the company.

It is important to consider why you think undervalued Australian growth shares you are looking at will re-rate and the likelihood of your ideal scenario not happening.

With this in mind, we outline four of our favourite undervalued Australian growth shares.

 

Our four favourite undervalued Australian growth shares
1. Infomedia (ASX:IFM)

Infomedia ranks first on our list undervalued Australian growth shares.

We’ve written about IFM several times before – it is a company that provides cloud-based parts and service software to the global automobile industry. 

Infomedia has been held back for a few reasons including a slowdown in the automotive sector, the Tech Wreck of 2022 and multiple takeover offers that never went ahead.

So what about the latter? Investors fear that the suitors found something in their due diligence that prevented them from closing a deal quickly or at all. We would observe, however, that it was IFM that opted to walk away from the talks.

While the slowdown in the automotive sector is a real trend due to the pandemic, it will only be another 12 months until car sales return to pre-pandemic levels.

And we think IFM’s software can play a major part in it, helping provide better experiences from existing and would-be customers, as well as help them grow sales.

As for the Tech Wreck, we think the worst is over – at least for companies like Infomedia that are profitable.

We think it can continue to re-rate as it continues to defy market expectations, hence its place on our list of undervalued Australian growth shares.

 

2. ReadyTech (ASX:RDY)

ReadyTech is a provider of various SaaS services including (but not limited to):

  • Student and learning management systems for education and training providers
  • Payroll and HR solutions for mid-sized companies
  • Government and justice case management

Similar to Infomedia, it has been sold off over the Tech Wreck and a takeover bid that never went ahead – although in RDY’s case, it was because its institutional backers were unwilling to get behind it – one shareholders (Microequities Asset Management to be exact) going so far as to say ‘ReadyTech is a TechnologyOne in the making’. For comparison’s sake, TechnologyOne (ASX:TNE) has a $4.9bn market cap.

We think this company can continue to benefit from continually growing revenues and profit – It is aiming to achieve over $160m in organic revenue in FY26, which would be double FY22 levels.

It boasts high revenue retention rates as well as continually growing average revenues per new customer. It is an active R&D investor (putting over 30% of its revenues in R&D activities) and is an eager M&A participant.

The analysts covering it have a mean target price of $4.29, a 29% premium to the current share price, and are expecting good results in FY24 – 15% revenue growth and its profit to more than double.

 

 

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3. Dominos Pizza Enterprises (ASX:DMP)

Dominos Pizza Enterprises is a master franchisor of Dominos for 13 markets including Australia, New Zealand, Japan, Taiwan, Singapore, Cambodia, Malaysia, the Netherlands, Belgium, France, Denmark, Luxembourg and Germany.

Notwithstanding that we think this is one of the best undervalued Australian growth shares, we concede at the outset it may not return to growth for some time.

After benefiting from a track record of long-term growth since 2005 and pandemic lockdowns that led to people ordering more takeaway food and opting for pizzas, shares have retreated in the last 18 months.

Although Dominos sales have held up, it has been smashed with increased input costs. By inputs we mean pizza toppings, wages and energy costs.

The company has been aware of this for some months but has believed it can just pass on costs to consumers while retaining the same customer numbers.

But in promising shareholders at its 1HY23 results that it would provide menu items ‘for more price conscious customers’, it conceded it was wrong.

So why does it still belong on the undervalued Australian growth shares list? Because of its long-term ambitions, believable thanks to its track record of growth.

Dominos is aspiring to grow its store footprint by 9-12% over the next 5 years. By 2033, it is hoping to have an 84% larger footprint in the Asia-Pacific and a 123% larger footprint in Europe.

It hopes to outmuscle competitors by having a larger footprint and scale but by providing a strong value-based customer experience and consequently having a better reputation.

 

4. NextDC (ASX:NXT)

Finally on our list of undervalued Australian growth shares is NextDC (ASX:NXT). We accept that a company valued at nearly $7bn and has a share price over 10x its IPO over a decade ago may not seem like a growth stock, but hear us out.

Silk Laser is an owner and operator of cosmetic injections and skincare clinics and products, with ~140 outlets across Australia and New Zealand.

Investors fear that consumers will be forced cut back their spending on laser treatments to meet more ‘non-discretionary’ needs.

This company has a portfolio of 17 data centres around Australia. Data centres are buildings hosting applications that store and share application and data. If you’ve used technology of any kind (whether computers or even mobile phones), you’ve likely been assisted by a data centre without even knowing it.

In the early 2010s, only the major telcos had data centres. The company bet that businesses and their customers needed and wanted more capacity. Despite the upfront capex, data centres can generate revenue fast once operational.

NEXTDC was in a good space during the pandemic due to the rise in remote working. So what? Well clearly you don’t just want all your data sitting in an office somewhere. And businesses have enough worries as it is without having to worry about infrastructure and whether or not it can operate.

But the company is betting that the trend is not slowing down. Only a couple of months ago, it raised over $600m for new data centres in Auckland and Kuala Lumpur. This is the company’s first significant investment outside Australia and into the high-growth APAC region. And this deal now gives it liquidity of $2.6bn.

 

Undervalued Australian growth shares can be found

Some investors may disagree with these stocks and seek out other undervalued Australian growth shares.

Before considering an investment, always consider why the company has fallen and the likelihood that things will turn around, accounting for what’s happening in its industry and the broader economy.

And of course never invest more than you are willing to lose. With these tips in mind, it is possible to make money from undervalued Australian growth shares.

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