ASX shares that have dropped a lot because of short-term reasons could be good buys to pounce on.
I really like businesses that are growing revenue because that’s one of the best ways to grow profit. It’s profit that usually drives share prices higher over time through the various market and news events.
Higher interest rates have thrown a spanner in the works, but I like the two ASX shares below, even if interest rates don’t change for a long time.
Rural Funds Group (ASX: RFF)
This business is a real estate investment trust (REIT) that owns a bunch of farmland across different sectors including almonds, macadamias, vineyards, cattle and ‘cropping’.
Higher interest rates are troublesome because it increases the cost of debt for a REIT. It also puts the pressure on farm valuations. But, the Rural Funds share price fall of 27% in the last 12 months and 42% since December 2021 seems too negative.
The ASX share has hedged, meaning fixed the interest rate of, a substantial portion of its debt for the next two or three years, so the interest rate costs shouldn’t go up too much during this period.
A lot of its rental income is linked to CPI inflation, so the elevated inflation that we’re seeing is helping rental growth. Some of the other rent grows at a fixed rate, so there’s growth every year. Every so often there’s a market review of the rent, which can boost the lease’s revenue.
It’s expecting to distribute 11.73 cents per unit in FY24, which would be a distribution yield of 6.4%.
Xero Limited (ASX: XRO)
Xero is a software business that specialises in accounting and business operations.
The Xero share price is down 17% over the past month and it has fallen 20% from the end August 2023.
Its FY24 half-year result saw a number of pleasing metrics. Operating revenue jumped 21%, with subscribers increasing 13% and average revenue per user (ARPU) growing 6% after price increases.
The ASX share’s gross profit margin improved from 87% to 87.5%, underlying EBITDA (EBITDA explained) grew 65% to $204.5 million and free cash flow jumped $91 million to $106.7 million.
As it keeps adding subscribers, I think the company will see further improvements of the profit margins.
Subscriber growth is likely to be slower in the next five years compared to the last five years – it’s difficult to keep growing subscribers by 10% year after year as that number gets bigger – so the rising ARPU and improving margins can keep profit growth going at a good pace.
The ASX share is targeting an operating expense to operating revenue ratio in FY24 of around 75%, which would be an improvement on FY23. Xero’s long-term aspiration is to keep improving the operating expense ratio and its operating profit margin.
