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Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Bell Direct market analyst Grady Wulff names two cheap ASX shares to buy and one to hold.
Cut or keep?
The Motley Fool: Let's examine three ASX shares that have been devastated this year and see if you think each of these fallen stars is now a bargain to pick up or if you'd stay away.
The first one is the baby formula mob Bubs Australia Ltd (ASX: BUB), which has halved since mid-August. What do you reckon?
Grady Wulff: Bubs Australia, it is a buy from Bell Potter and Bell Direct and myself.
It's a really well positioned stock, it's a needed stock. They produce what we need in the world. There's always going to be demand for baby formula. Obviously, they've been sold off this year.
We've seen a bit of headwinds in the fact that China and Hong Kong shipments are down as their competitor A2 Milk Company Ltd (ASX: A2M) is really specifically focusing on the Chinese market through a2 Milk's partners Synlait Milk Ltd (ASX: SM1), but this really opens up the domestic market for Bubs to target in Australia.
Also, given the fact that they were the first one in Australia to get the FDA approval to help out with the US baby formula shortage — and a2 Milk only just got approved, and they've only been approved until January. So Bubs is definitely looking to have that strength and that competitive advantage and that's not going away anytime soon. We know US consumers are loving the Bubs formula, so it's looking good.
Revenue's expected to double by 2025, impacts set to hit profit next year, and the company has a cash balance of $23.3 million. So they're looking really good.
They are sold off at the moment, as you said, but it's just a tough time in the market. So we are definitely bullish on this one.
MF: Next one is Temple & Webster Group Ltd (ASX: TPW), which has fallen 56% year to date. What are your thoughts?
GW: Temple & Webster is a keep at the moment. It's not a buy or sell, it's a keep or a hold with us with a price target of $6.
They're profitable, the strategy is near term but at the moment, we've seen online furniture, and just furniture shopping in general, has not been a priority for a lot of consumers in Australia. We've seen consumer demand going down, especially with rising interest rates. We also noticed that there was a tailwind during COVID because everyone was staying at home — everyone thought "Let's change my house around, let's buy new furniture". So that has definitely come down in FY22 and FY23.
The good thing about this is that they're a leader in the online space. So we have seen that shift over the pandemic, post-pandemic, into online shopping, which is not going away anytime soon. So they're really well capitalised to benefit from this.
But yeah, the higher margins from pre-COVID level or during COVID levels aren't going to be seen for a long time to come, because everyone's done their shopping. Everyone's more value-focused as opposed to luxury-focused. So at the moment, we've got anticipated weakened demand by consumers.
MF: And the last one, I think, is an American mob but listed here in Australia. Avita Medical Inc (ASX: AVH), which has dropped 41.5% year to date.
GW: A UK company. They are well capitalised while expecting to release major clinical trial results in the near future. At the moment, it's a speculative buy rating with the price target of $3 from Bell Potter.
The company is making waves and they've got really strong revenues up 29% year on year to US$9.1 million for the commercial product sales, but they are burning a lot of cash. That's one thing to keep in mind. They've burnt $16.2 million in cash from the nine months to September 30, but the company is well funded with $88.2 million in the bank. So they're okay on the monetary front.
The revenues were 7% above what Bell Potter expected for the September quarter. And the company, at the moment, is waiting for the catalyst of its PMA supplements being lodged and reporting on secondary endpoints for vitiligo, the skin condition. They have specific products for that. They expect to lodge the supplements for PMA soon and it's looking to get approval mid-2023. So around that approval coming through that the company really takes off.
But while we're waiting for that, it definitely is one to watch and potentially one to look into for next year.
