Undervalued Australian growth shares : Here are 4 of our favourites

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. 

 

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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. 

 

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. This company provides cloud-based parts and service software to the global automobile industry. 

We’ve written about IFM several times before, most recently last week and investors should read that article for a more detailed outline of this company and our valuation of it.

This company has been hit 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 would point to the company’s recent re-rating following its 1HY23 results.

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. Judo Bank (ASX:JDO) 

Next on our list of undervalued Australian growth shares is Judo Bank.

The company, that was founded in 2016 and went public in 2021, is focused on the old-fashioned craft relationship banking for Small and Medium-sized Enterprises. 

Judo reckons the big banks weren’t really doing the job anymore and it saw an opening in the market.

The bank has been rapidly growing its loan book that reached ~A$7.5bn in December 2022. Judo Capital believes the book can ultimately get to A$15-20bn in the medium term.

The company is profitable, has consistently exceeded prospectus forecasts and has a Net Promoter Score of 77. The latter figure is well ahead of the Big Four Banks that think a score just above 0 is something to crow about. 

Why then has it underperformed since listing? Two reasons.

First, we think it has been dogged by its past references to itself as a ‘neobank’ given the collapse of other firms like Xinja.

Judo is also a very different beast to all of them, being SME-focused rather than consumer focused and being profitable. 

Second has been the unpopularity of bank stocks in a rising interest rate environment.

We also think it has suffered from investor perceptions that SMEs will endure difficulties in a high-inflation environment and therefore so will Judo. 

This just has not been the case – at least not yet. We would point our 4 things.

First, Judo is picky about who it does business with, turning away more than half of would be customers and avoiding some sectors (particularly construction) altogether. 

Second, only 15 out of every 3,300 customers are in more than 90-day arrears at the moment.

Third, even in a doomsday scenario, where 3% of Gross Loans and Advances (GLA) were in default (double the average sector rate during the GFC), it would be safe – its CT1 ratio would still be well ahead of its peers.

We think Judo can re-rate as it continues to defy the doomsayers. 

 

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. 

We would advise investors not to buy in until at least August when its full year results for FY23 are due. The company will likely provide a trading update as well. 

 

4. Silk Laser Australia (ASX:SLA)

Finally on our list of undervalued Australian growth shares is Silk Laser Australia (ASX:SLA). 

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.

In reality, this has not been the case. 

The company’s network cash sales in 1HY23 increased 35% to $102.8m and revenue grew 21% to $49m. The reason for the discrepancy is that it operates with a franchise model. 

Silk Laser’s underlying profit increased 15% to $6.6m and its statutory profit rose 22% to $5m. It closed the period with 142 clinics, up from 122 just 6 months earlier, along with $19.4m in cash on the balance sheet. 

The average customer spend was $679 and the company’s Net Promoter Score was 80. 

Turning to consensus estimates, there are 4 analysts covering the stock and they expect $97.5m in revenue, $25.8m in EBITDA and $0.22 EPS for the full FY23, each representing growth of 17-22%.

Looking to FY24, analysts call for $106.2m in revenue, $29.7m in EBITDA and $0.26EPS, each representing growth of 9-18%. 

The latter trio of estimates mean the company is trading at just 4.4x EV/EBITDA, 7.6x P/E and 0.76x PEG right now.

Furthermore, we estimate that FY24 results (if replicated) would represent a 28.8% ROE (Return on Equity) and a 17.1% ROA (Return on Assets). 

So Silk Laser Australia is one of the best undervalued Australian growth shares. 

 

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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