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2 ASX shares rated as strong buys by brokers

The 2 ASX shares in this article have been rated as strong buys by brokers, including discount retailer Reject Shop Ltd (ASX:TRS).
The post 2 ASX shares rated as strong buys by brokers appeared first on The Motley Fool Australia. –

There are a few ASX shares that are highly regarded by multiple brokers.

Sometimes you can get differences of opinion from brokers about different companies. One broker might say that Woolworths Group Ltd (ASX: WOW) shares are a buy, whilst another one could think that Woolworths shares are a sell.

When many brokers think that an ASX share is a buy then it could be an indicator that there’s an opportunity. Or that they’re all wrong.

With that in mind, here are two that are liked by several brokers:

Reject Shop Ltd (ASX: TRS)

The discount retailer is rated as a buy by at least three analysts including Ord Minnett.

Reject Shop just announced its FY21 half-year result. It announced that sales fell by 0.3% to $434.3 million, with comparable store sales flat.

The company said that sales were impacted by COVID-19 restrictions and stock availability issues because of delays in international shipping. However, almost all Christmas stock was on the shelves before Christmas and it was effectively sold out before Christmas Eve.

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) went up by 20.8% to $31.1 million, with underlying EBIT rising by 44.9% to $23.3 million and underlying net profit after tax (NPAT) going up 46.5% to $16.3 million. This was achieved despite a write down of hand sanitiser of $3.6 million.

A key part of the profit growth was the cost of doing business (CODB) margin improving by 230 basis points to 34.9%. That included $2.4 million in administration expense savings and $8 million in store expenses.

The reduction in inventory by the ASX share, as well as the simplification and standardisation of in-store processes, during the half were the main drivers of store labour reducing to 13.6% of sales, down from 14.9% in the prior corresponding period.

Reject Shop reminded investors that it normally makes a loss in the second half of the year, so the first half shouldn’t be used as an indicator for the second half. It also continues to be affected by lower foot traffic and higher shipping charges.

It had net cash of $107.6 million at 27 December 2020 on the balance sheet, up from $51.9 million at 29 December 2019.

Ord Minnett said that the underlying EBITDA was better than the broker was expecting because of cost reductions. It has a share price target of $10.34 for Reject Shop.

Baby Bunting Group Ltd (ASX: BBN)

Baby Bunting shares are liked by at least five brokers, including Morgans.

This is another ASX retail share that is popular. The baby and infant product retailer announced its FY21 half-year result earlier this week.

It reported that pro forma net profit after tax rose by 43.5% to $10.8 million and statutory net profit grew by 54.7% to $7.5 million.

This result was driven by growth across various parts of the business. Total sales increased by 16.6% to $217.3 million, drive by online sales growth of 95.9% and comparable store sales growth of 15% (or 21.8% excluding Victorian stores).

The ASX share saw increased profitability at various levels of its financials. The gross margin improved by 41 basis points to 37.4%, helping pro forma EBITDA increase by 29.7% to $18.5 million.

Due to the strength of the result, the Baby Bunting board decided to increase the interim dividend by 41.4% to 5.8 cents.

In a trading update, Baby Bunting said that comparable store sales for the first six weeks of the second half of FY21 showed growth of 18.5%.

Morgans said that whilst the net profit wasn’t quite as good as expected, the expansion to New Zealand adds to Baby Bunting’s growth prospects and may offer better returns compared to retail peers. The retailer’s growth for FY23 and further into the future looks better because of New Zealand.

The broker has a share price target of $6.39 for Baby Bunting.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Woolworths Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post 2 ASX shares rated as strong buys by brokers appeared first on The Motley Fool Australia.

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