Fund manager L1 Capital recently held an investor presentation and highlighted two S&P/ASX 200 Index (ASX: XJO) shares.
Some investors may choose to focus on the biggest companies like Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP) and CSL Ltd (ASX: CSL), but there may be other opportunities further down the market capitalisation list.
Indeed, smaller companies may be less monitored by analysts and investors, creating conditions for those ASX 200 shares to be undervalued.
Let's dive into two companies L1 thinks are "low P/E stocks with enormous cash generation".
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BlueScope Steel Limited (ASX: BSL)
BlueScope is a steel producer operating in Asia Pacific and North America.
The fund manager described the company as resilient and diversified, with "commoditised" earnings streams protected by a downstream branded business (such as Colorbond and Truecore).
L1 thinks US steel markets are "structurally attractive", and BlueScope has a strong industry position. The fund manager said BlueScope's balance sheet has low levels of debt and that the company has the ability to use cash flow generated for increased shareholder payouts or acquisitions.
The business has a "track record" of shareholder returns and investments that deliver a strong return on invested capital (ROIC).
L1 said the ASX 200 share is trading at a significant discount to its North American steel peers which are trading at between six to eight times earnings before interest, tax, depreciation and amortisation (EBITDA). BlueScope, on the other hand, is trading at an "undemanding" valuation of around 4.5 times EBITDA.
The BlueScope Steel share price is almost 10% lower than where it started the year, as shown on the chart below.
AGL Energy Limited (ASX: AGL)
The other ASX 200 share that L1 pointed out was AGL. It's the lowest-cost baseload generator in the key markets of Victoria and New South Wales. The company has "regulated assets with significant barriers to entry", according to the fund manager.
L1 believes electricity demand is set to grow substantially over the medium term due to data centres, electric vehicles and AI.
The investment team suggests the business can generate strong free cash flow in the medium term, which can "fund high dividends and substantial investment" into the energy transition in areas like batteries, and make solid returns. The fund manager also said the management team at AGL is "disciplined".
In terms of the valuation, L1 said the ASX energy share is valued at an enterprise value to EBITDA ratio of 4.5 times, which is "well below" its historical range of around six times.
The AGL share price has risen around 8% since the start of 2024, as we can see on the chart below.
