At the small end of the Australian share market, there are a number of companies with the potential to grow materially in the future.

Two that Morgans rates highly and has on its best ideas list this month are named below. Here’s what you need to know about them:

Strandline Resources Ltd (ASX: STA)

The first small cap ASX share that has been named as a buy is Strandline Resources.

This mineral sands developer is a new addition to the best ideas list, with Morgans appearing to be very excited by this “rare investment proposition.” It explains:

STA is a heavy mineral sands explorer and developer, with projects in Australia and Tanzania. We continue to note that STA is a rare investment proposition. It enjoys: 1) 100% ownership of a world-scale/ strategic asset in a tier 1 jurisdiction; 2) lenient debt terms; 3) visibility on upcoming cashflow/ de-risking; 4) proven, backable management; 5) a reputable board; and 6) clear M&A appeal while trading at a material discount.

Morgans has a 75 cents price target on the company’s shares. This compares very favourably to the latest Strandline Resources share price of 34 cents.

Universal Store Holdings Ltd (ASX: UNI)

Another small cap ASX share the broker is bullish on is Universal Store. This youth fashion retailer makes the list again this month thanks to its very positive outlook in a tough retail environment. The broker highlights its strong brands, expansion opportunities, and target demographic as reasons to buy. It said:

Universal Store (UNI) is one of the largest and fastest growing fashion retailers in Australia. Through a national network of over 100 stores and a successful online platform, UNI curates a diverse range of men’s and women’s fashion, shoes and accessories from local and international brands as well as its own private labels. UNI’s stores trade under the Universal Store, Perfect Stranger and THRILLS banners. UNI has opportunities to grow steadily through the rollout of bricks and mortar stores, increased digital penetration and expansion of wholesale channels. We expect some volatility in near-term earnings as consumer demand for highly discretionary categories like apparel ebbs and flows, but we see any share price weakness as an opportunity to buy into a high quality retailer with strong medium to long-term prospects.

Morgans has an add rating and $6.85 price target on the company’s shares. This compares to the current Universal Store share price of $4.40.

The post Morgans names 2 of the best small cap ASX shares to buy appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Looking for an ASX All Ords stock trading at a sharp discount to its peers?

Then you may wish to run your slide rule over workforce solutions company PeopleIn Ltd (ASX: PPE).

The ASX All Ords stock is trading about flat in 2023 and is down 12% over the past 12 months. That compares to a 3% loss posted by the All Ordinaries Index (ASX: XAO) over that same time.

PeopleIn is also known for its reliable, twice-yearly dividends. Its shares trade on a trailing dividend yield of 4.4%, fully franked.

At the current share price, PeopleIn trades at a price-to-earnings (PE) ratio of about 12 times.

The ASX All Ords stock trading at a 35% discount

Josh Clark, portfolio manager of QVG Capital’s long-short fund, named PeopleIn as the most undervalued share on the ASX.

“PeopleIn is a diversified labour services business that has delivered double-digit organic growth supplemented by sensible acquisitions,” Clark said (courtesy of the Australian Financial Review).

“In fact,” he said of the ASX All Ords stock, “they’re at a 35% discount to the average industrial despite having grown EPS (earnings per share) at 22% over an extended period.”

Addressing potential concerns about why PeopleIn is trading at a steep discount, Clark said:

Stocks are always cheap for a reason but in this case, it’s non-operational. Low liquidity and their gearing capacity appear to be keeping a lid on the valuation. However, if they continue to grow as we expect, these things will be resolved in time.

PeopleIn released its half-year results on 17 February.

The ASX All Ords stock reported revenue of $597 million for the six months, up 89% year on year. Normalised profits came in at $21 million, up 50% from the prior corresponding period.

How has the PeopleIn share price performed longer-term?

As long-term investors, it pays to take a step back to see how a company has fared over more than just the past year.

In the case of this ASX All Ords stock, if you’d bought shares five years ago, you’d be sitting on a gain of 105%. And that doesn’t include the dividend payouts.

The post Fundie reveals the ASX All Ords stock trading at a 35% discount appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Peoplein. The Motley Fool Australia has recommended Peoplein. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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S&P/ASX 300 Index (ASX: XKO) stock Rural Funds Group (ASX: RFF) is one ASX dividend share that I have in my portfolio for passive income.

I think it’s a business worth investing in for the regular, attractive distributions that it pays.

While it doesn’t pay a distribution every week, the ASX 300 stock pays income to investors every quarter. We just need to split that quarterly payment into weekly amounts.

For readers who haven’t heard of Rural Funds, it’s a real estate investment trust (REIT) that owns a portfolio of farmland across Australia. The business is invested in a number of different farm types including almonds, macadamias, vineyards, sugar, cotton, and cropping.

Passive income goal

The ASX dividend share has a goal of increasing its distribution by at least 4% per annum, which it has done since listing several years ago.

Let’s assume for the sake of this article that the FY23 quarterly payment from the ASX 300 stock continues over the next 12 months.

In FY23, it’s expecting to pay a total distribution of 12.2 cents, which is a gross payment of 3.05 cents per quarter.

To get $200 per week, we’re essentially aiming for an annual target of $10,400. To reach that passive income goal, we’re talking about owning 85,246 Rural Funds shares. Buying this many shares would currently come at a cost of around $168,000.

Is Rural Funds a good ASX dividend share?

I think it’s one of the best REITs on the ASX. The 30% or so fall in the Rural Funds share price over the past year has pushed up the distribution yield to 6.2%.

It has 67 properties with quality tenants – around 80% of its forecast FY23 lease revenue is from corporate lessees. Those tenants are on long-term rental contracts, with the current weighted average lease expiry (WALE) being around 12 years. That’s a long time for rent to be locked in.

Higher interest rates are hurting the rental profits of the business. But it’s benefiting from CPI and fixed indexation of its rental income, as well as market rent review mechanisms.

The business also has a development and leasing pipeline, where productivity improvements and conversion to higher and better-use developments are expected to generate earnings growth in future years. For example, its 3,000-hectare development is forecast to be completed by FY25.

Higher interest rates may hurt the ASX 300 stock’s farm values, but I think the Rural Funds share price decline has made up for that.

The post Want $200 in weekly passive income? Buy 85,200 shares of this ASX 300 stock appeared first on The Motley Fool Australia.

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More reading

• Analysts say income investors should buy ANZ and these ASX dividend shares
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Motley Fool contributor Tristan Harrison has positions in Rural Funds Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Rural Funds Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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There are countless ways of valuing businesses before deciding to pull the trigger on an investment. But, one often overlooked method for analysing an ASX share is its free cash flow (FCF) yield.

Essentially, the free cash flow yield measures the net cash generated by the company’s operations relative to its enterprise value. The enterprise value is simply its market capitalisation, plus its total debt, minus its cash and cash equivalents.

Simply put, this metric is similar to the price-to-earnings (P/E) ratio, but for cash flows. You might be thinking: why not just stick with the good ole’ fashioned P/E then?

Follow on to find out what the FCF yield offers over an earning multiple, what a good FCF yield is, and which ASX shares could be ‘good’ value based on this valuation method.

Why free cash flow yield can be useful

So much focus in the investing world is placed on earnings or net profit after tax (NPAT). However, the reality is this figure can sometimes be unintentionally misleading due to a variety of factors.

A common inclusion of a company’s bottom-line earnings is non-operational income. Examples of this might include one-off asset sales or property valuation gains. In such cases, the listed entity suddenly looks dirt cheap based on its temporarily improved P/E ratio.

Unfortunately, unless one is privy to the earnings-altering items, there is a good chance someone could buy into the ASX share believing they’ve found a deal too good to be true.

Whereas, the free cash flow portrays a truer reflection of the returns generated by the company’s operations.

Well, what is a good free cash flow yield? You might ask. Great question.

According to the legendary British investor and CEO of Fundsmith, Terry Smith, a 5% free cash flow yield is the minimum expectation.

During Fundsmith’s 2013 shareholder meeting, Smith explained:

I will only buy companies that have a free cash flow yield which is about 5% or more. The reason for that is if I buy those companies with that yield that is higher than those [4% to 4.5% yielding] bonds I can be sure of one thing… over the long term the free cash flow yield of our companies will rise […] I can be equally sure the coupon (yield) on the bonds won’t go up.

In other words, Smith seeks to own companies that generate a greater expected return than bonds. Which makes sense. If you didn’t think you could get a better return from your ASX shares, you’d buy bonds instead.

Next question… which companies listed in Australia fall into this ‘above 5%’ FCF yield category?

I’m glad you asked.

Which ASX shares are yielding more than 5%?

There are 35 companies on the ASX with a market capitalisation above $100 million and a free cash flow yield above 5% (as of Tuesday afternoon). Additionally, these companies posted a return on capital above 15% in the last 12 months, which is generally considered good.

The ASX shares with the highest FCF yield include coal shares Yancoal Australia Ltd (ASX: YAL), Whitehaven Coal Ltd (ASX: WHC), and Terracom Ltd (ASX: TER) as shown in the chart above. However, coal prices have fallen since the end of 2022, which could lead to a dramatic reduction in future cash flows.

Buying opportunities?

Most of the companies that make the cut are highly cyclical. This means they may not be the best fit for a portfolio if someone is looking for defensive ASX shares.

In saying that, there are still a few businesses that catch my eye as potential buys due to their sturdy balance sheets, growth history, dividends, and free cash flow yield.

Although retail shares could be prone to a weaker economy, the likes of Nick Scali Limited (ASX: NCK), JB Hi-Fi Limited (ASX: JBH), and Dusk Group Ltd (ASX: DSK) look relatively attractive. The share prices of these companies are down 5.6%, 8%, and 34% respectively over the last year.

Personally, I believe JB Hi-Fi is the pick of the bunch given its exceptionally cashed-up balance sheet. At the end of December 2022, the retailer held $391.2 million in cash and zero debt. And, its FCF yield is around 5.7%, surpassing Terry Smith’s bar.

The post Follow the free cash flow: Could these unloved ASX shares be worth buying? appeared first on The Motley Fool Australia.

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Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Dusk Group and Jb Hi-Fi. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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