Why the Adairs share price could be a bargain in FY23

This ASX retail share could be a cheap opportunity.

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Key points

  • The Adairs share price has been crunched in recent months
  • However, the broker UBS thinks it looks good value with a low p/e ratio
  • Adairs is undertaking a number of initiatives to grow profit

The Adairs Ltd (ASX: ADH) share price could be an opportunity ripe for the picking, according to experts.

It has been a tough time for the ASX retail share which has lost more than 40% in value over 2022 to date.

However, one expert feels that the fall has been too hard and now the company is an opportunity.

There's no way of truly knowing what is going to happen next on the share market unless you have a crystal ball. Mine isn't working at the moment.

But, as investors, we have to decide whether opportunities are good value and worth pursuing, or not.

UBS is a broker that sees substantial upside for the Adairs share price over the next year.

Broker rating on the Adairs share price

UBS rates Adairs a buy with a share price target of $3.70. That implies a possible rise of over 60% if the broker ends up being right.

Why does the broker see so much potential growth? A key part of the investment thesis is the cheap price-to-earnings (P/E) ratio. That's the multiple of earnings that the Adairs share price is valued at.

At the current Adairs share price, UBS thinks it's valued at around eight times FY23 estimated earnings.

However, the broker does acknowledge that the wider economic impacts of rising inflation and interest rates could hurt Adairs' revenue and profit. Profit margins may settle at a lower level.

But, not every expert is convinced. Morgans recently shifted its rating to hold, on expectations of a tough retail environment because Aussies will have less money to spend on the products that Adairs sells.

Even so, Morgans also thinks that Adairs has a low P/E valuation and it could pay a pretty large dividend. Morgans' numbers put the Adairs share price at seven times FY23 estimated earnings with a potential grossed-up dividend yield of 11.3%.

What's Adairs working on?

The Adairs share price could be influenced by some of the retailer's business plans for FY23 and beyond.

They recently acquired the Focus on Furniture business, giving Adairs greater access to the bulky furniture category (an $8 billion market). It plans a store rollout, online growth, and category and range expansion.

For the Adairs brand, the company wants to grow its store count and upsize some stores, expand its membership numbers, and broaden its range.

With Mocka, the online furniture business, Adairs wants to increase brand awareness, grow its range, and add a physical presence.

In FY23, Adairs will be cycling against periods of FY22 when there were lockdowns.

What is next?

Unless the business reveals a trading update or something else before earnings season, the next major update should be the FY22 result and probably a trading update for the first few weeks of FY23.

Adairs share price snapshot

Over the past month, the Adairs share price has risen by 33%. This compares with an 0.93% rise in the S&P/ASX All Ordinaries Index (ASX: XAO).

Motley Fool contributor Tristan Harrison 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 ADAIRS FPO. The Motley Fool Australia has positions in and has recommended ADAIRS FPO. 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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