Hidden value in an expensive ASX
How investors can uncover value beyond the index heavyweights.
Aussie investors are facing a barrage of economic headwinds. The energy crisis stemming from the middle east conflict, sticky inflation and a weak start to the year for the ASX200. Investors could easily be forgiven for assuming the share market is cheaper than it was in 2025.
However, market weighted valuation metrics suggest otherwise. My focus is finding ASX opportunities within our coverage universe. But first, let’s decipher these valuation metrics and locate the ASX sectors that are undervalued.
Is the ASX expensive?
I have collated data on every company in our ASX coverage and used our analysts’ fair values to assess each share. The market cap weighted price to fair value (P/FV) across our coverage universe is currently 1.23x. The largest companies on the ASX are trading at a sizeable premium to our fair value estimates. Because the ASX200 is market cap weighted, this premium among the largest ASX shares pushes the index itself into overvalued territory.
Now here’s where things get interesting. The equal weighted price to fair value is 0.91x, indicating the average share in our coverage is trading at a discount. This suggests significant value opportunities exist outside the largest names on the ASX.
Market weight vs. Equal weight
Both metrics use each company’s price to fair value (P/FV) ratio. A P/FV greater than 1 means the share is trading at a premium while a P/FV below 1 indicates it is trading at a discount.
A market weighted P/FV gives larger market capitalised companies more influence. This is useful when determining if major ASX constituents are overpriced. However, this also hides opportunities further down the index. An equal weighted P/FV treats every share the same regardless of market capitalisation. This allows investors to determine if value exists beyond the larger names.
Comparing these two metrics highlights a clear disconnect in our market. While large cap companies look expensive, the average share is undervalued. The next step is to identify which industries or sectors are driving this mispricing.
Prospecting in discounted sectors
I have calculated the sector specific equal weighted P/FV. This highlights which sectors are most discounted while also avoiding any weight bias from large companies. Clearly technology, real estate and consumer cyclical sectors are undervalued. Conversely, financials and basic materials are the most expensive as seen in the table below.
Global events such as the US Iran conflict can cause a ‘flight to safety’. This inflates the prices of less risky assets, which can push the P/FV multiple into the overvalued territory. There is evidence of this within the sector data above.
For example, utilities are the third most expensive industry which traditionally is considered defensive. A clear spike in the Volatility Index (VIX) since the start of this year is good evidence that investors are facing greater uncertainty and flocking to risk off investments such as utilities and banks.
Screening for quality
To get down to stock specific opportunities, it’s important to set an investment objective. In this example, I am looking for value in the three cheapest sectors without compromising on quality. This will mean filtering for 4-5 star rated shares with a minimum narrow moat rating. I have used the Morningstar stock screener to filter through our coverage and the resulting list is below.
The purpose of screening is to eliminate stocks which do not meet my minimum requirements. The above short list of 13 shares allows for closer examination of quality names trading at a discount to fair value. Additionally, the sector analysis above gives me more confidence that these names may be overlooked due to wider market factors.
Scentre Group (ASX.SCG)
- Fair Value Estimate: $4 (12% discount at 20 April)
- Rating: ★★★★
- Moat: Narrow
Scentre Group owns and operates many of Australia’s well known Westfield shopping centres. This REIT generates rental income from its retail tenants and distributes typically 70-80% of earnings back to shareholders. The share price has fallen 16% since the start of the year, primarily due to sector wide weakness in REIT’s. Retail REIT’s have fallen out of favour with investors given inflationary pressures are expected to keep rates higher for longer – supressing consumer spending and increasing retail operating costs.
SCG’s price slump has pushed the REIT into undervalued territory despite a strong earnings result in February. The restricted supply of retail floor space in Australia alongside the distinguishing features of Westfield centers are two key intangibles that are unique to Scentre Group. These intangibles are the core pillar in the REIT’s narrow moat rating. Interestingly, Scentre is only one of three REIT’s in our coverage with a moat rating (all narrow moats).
Furthermore, our analyst Yingqi Tan believes Scentre has navigated the emerging e-commerce threat relatively well by increasing weighting in experience-based offerings to maintain foot traffic. In other words, almost half of the Westfield retail stores (tenants) offer things to be consumed onsite such as dining, fitness, beauty and education. The current distribution yield sits at 5% (currently 0% franked).
SiteMinder (ASX.SDR)
- Fair Value Estimate: $11 (70% discount at 20 April)
- Rating: ★★★★★
- Moat: Narrow
SiteMinder is the world’s largest e-commerce software platform for the global hotel industry. The company provides software to accommodation providers to assist them in managing online bookings, revenue and guest experience. They also connect their accommodation providers with online booking channels; think of Booking.com and Expedia.com. The share price has suffered alongside the remainder of the ASX technology sector, down 45% since the start of the year.
The investor fears surrounding the impacts of AI on software companies is pronounced. While AI disruption is expected, the extent of its impact will be individual to the company. Our analyst Roy Van Keulen notes that developments in AI could potentially lessen the scale advantages SiteMinder has over competitors which is an important pillar of its moat.
However, at this stage AI developments show limited threat when looking at the entire software workflow of SiteMinder. As such, the current fair value indicates the shares are materially undervalued. SiteMinder is one of the few ASX software companies in our coverage that is still in its early growth phase indicating it still has a long runway for growth.
Amcor (ASX.AMC)
- Fair Value Estimate: $90 (36% discount at 20 April)
- Rating: ★★★★★
- Moat: Narrow
Amcor is the largest global provider of plastic packaging with dominant positioning across the Americas, Europe and Asia. The shares have fallen 10% year to date despite a strong February earnings result. Investors expect consumer confidence to hurt as interest rates remain higher for longer. This has impacted consumer cyclical shares such as Amcor. The vast majority of Amcor’s revenue is driven by food and beverage packaging which is considered defensive. However, Amcor is exposed to inventory cycles and consumer demand which is why it’s considered a ‘consumer cyclical’ company.
Amcor has a narrow moat which is driven by its cost advantages and sticky customer base. It’s popularity with income investors is driven by its progressive dividend policy. The dividend aristocrat has increased its dividend for 25+ consecutive years. As it is primarily listed on the New York Stock Exchange, the dividends are declared in USD and paid out to Aussie CDI shareholders in AUD. The current yield following its fall in share price is 7% (no franking).
