The fund manager L1 Capital has identified two S&P/ASX 200 Index (ASX: XJO) shares that could be great value opportunities to invest in.
L1 is still cautious on the outlook for the stock market “given the looming impact of significant interest rate hikes, weakness in leading economic indicators, gradually increasing pressure on corporate earnings and lingering tail risk from geopolitical tensions.”
The fund manager thinks that there is going to be more market volatility, as investors reassess their expectations for the economy, interest rates and corporate profits.
There were two ASX 200 shares that L1 pointed to in an update to investors, which it thinks are mispriced, which can “deliver attractive long-term returns.”
Downer EDI Ltd (ASX: DOW)
L1 noted that the business is transitioning to being a “higher-quality urban services portfolio”. It recently completed the sale of its Australian transport projects business, which was a more volatile and less profitable division.
The sale price for the business was an enterprise value of $212 million, with the majority of the sale proceeds received on 20 June 2023.
The fund manager pointed out that Downer has “renewed leadership” at both the board and senior management level. The ASX 200 share is also pursuing “additional self-help measures and simplification initiatives within the core business.”
Downer is looking to reduce its costs by $100 million per annum by FY25, while also looking at further asset sales.
L1 then outlined its final thoughts on the company’s outlook:
We anticipate these changes, will help transform Downer into a more resilient, less-capital-intensive and lower risk services business exposed to growing, annuity-style contracts.
BlueScope Steel Limited (ASX: BSL)
BlueScope says that it’s a provider of innovative steel materials, products, systems and technologies, headquartered in Australia with operations spread across North America, Australia, New Zealand, Pacific Islands and throughout Asia. It claims to be one of the world’s leading manufacturers of painted and coated steel products.
L1 pointed out that US steel spreads continue to be above long-run averages, which gives the company a tailwind for the ASX 200 share’s earnings in the second half.
There are three things that show BlueScope is committed to growing its US operations, according to the fund manager.
First, there’s the 850kt per annum capacity expansion and 500kt per annum debottlenecking project at the North Star facility in Ohio.
Second, there was the acquisition of the US’ second largest metal coating and painting company, Coil Coatings.
Third, there was the establishment of BlueScope Recycling from the acquisition of the MetalX recycling business.
L1 concluded with some very bullish comments about the ASX 200 share:
Despite the recent strong recent share price performance, we continue to believe the market significantly undervalues BlueScope’s unique and strategic asset base.
