In these uncertain times, it’s tempting to run scared from certain sectors. The outlook for retailers or car dealerships, for example, is far from enticing.
But Peel Hunt’s list of 2018 top value stocks highlights some interesting opportunities in both these sectors that investors might want to consider.
Its picks include AO World (AO.), Carpetright (CPR) and Topps Tiles (TPT) among the unloved retailers, while Lookers (LOOK) is seen as particularly good value following a recent slide in share prices across the motor forecourt industry.
Peel Hunt notes that while car dealers are facing tough comparatives until March, given that last year’s car registrations were at a record level, there’s an opportunity for Lookers beyond the first quarter of 2018.
Analyst John Stevenson thinks that Lookers is well placed to continue building market share and to act as one of the leading consolidators in the sector.
He adds: “Lookers continues to outperform the new car market and also continues to deliver strong growth in used car sales and aftersales.”
And should the worst happen, Stevenson reckons that Lookers is capable of withstanding a financial crisis-type demand reduction involving a 20% sales decline at reduced margins.
He said: “While profits would broadly halve in this scenario, the shares would be trading on just 13x PE and the balance sheet would be at 1.5x debt/EBITDA and well within current banking arrangements.”
Believing that the shares have been oversold on a long-term basis, Peel Hunt has a target price of 190p compared with the current 100p. That would return Lookers to a level last seen at the end of December 2015.
AO World is an interesting inclusion on Peel Hunt’s list, particularly as the household electrical goods retailer has consistently disappointed investors since it joined the stock market in early 2014.
Even after Thursday’s reassuring trading update, it is close to all-time lows and at a 70% discount to its peers, driven by the costs of expansion into new markets.
However, Peel Hunt notes that AO UK is gaining market share and is profitable, while its expansion into Germany and the Netherlands has offered proof that the concept can work overseas..
With a target price of 145p, analyst James Lockyer said: “The progress gives us confidence it can replicate the model further. The more countries on board, the less risky the next one becomes.”
Carpetright shares are languishing at around 170p, which is down more than 70% on the price in the summer of 2015.
However, John Stevenson thinks that there are signs of recovery in the UK, with more than half of the estate now trading under a new look and like-for-like sales from these shops up 4% in the most recent trading period.
Trading on a PE multiple of 11.8 and enterprise multiple of 4.8, Stevenson believes the valuation reflects short-term forecast risk rather than long-term recovery potential. He has a target price of 230p.
Topps Tiles is another retailer short on support in the City, with shares currently at 88.5p and valuing the company at about £170 million.
But Stevenson said the company is showing signs of delivering a shift in forecast momentum. The outlook for cash generation is much improved, with a well-covered dividend yield of about 4.6%. Trading on a PE multiple of 10.8, Peel Hunt believes shares for the UK tiling market leader look oversold.
Peel Hunt’s value list from last year achieved a 43% rise, with top performers including Serica (SQZ), Watkin Jones (WJG), Eland (ELA), Vitec (VTC), Morgan Sindall (MGNS), Coats (COA) and Forterra (FORT).
The list is based on value opportunities where a stock is trading on a historic enterprise value ratio below 7.5 and a 12-month forward PE ratio at least of a 10% discount to the current average for the universe of just 13.
West Africa-based Eland Oil & Gas (ELA) remains on the list in 2018, with Peel Hunt believing that shares are trading at a 40% discount.
Over the last past 18 months, analyst James Carmichael said Eland had established a track record of delivering low-cost production growth from the Opuama field in Nigeria, and successfully mitigating above ground risks.
Other potential upsides highlighted in the Peel Hunt note include publisher Trinity Mirror (TNI), which the broker thinks could more than double in price to 190p.
Analyst Malcolm Morgan said: “The big macro trends – Brexit, shift to digital – are unappealing, but the rating ignores the micro attractions of a robust balance sheet, pension clarity, rigorous cost control and a potentially value-creating acquisition strategy.”
Meanwhile, construction and services firm Kier (KIE) has a forecast 46% upside to 1600p, according to analyst Andrew Nussey.
He said an update later this month should confirm that the group is on track for double-digit growth in the 2018 financial year and to deliver its Vision 2020 objectives.
Nussey adds that the balance sheet remains strong with average net debt backed by balance sheet assets: “We believe that this well-regarded management team has the potential to deliver attractive organic EPS growth, while still enhancing returns, cash and dividend profiles.”
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.