2 ‘hidden’ value stocks I’d buy today

Roland Head reveals two stocks that could be trading at big discounts to their fair value. Is that a reason to buy?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I’m looking at two stocks which both trade at substantial discounts to their book value. Such stocks are popular with value investors because they give you the opportunity to buy assets at less than their true worth. But you do have to be careful. There are sometimes good reasons for a stock to trade at a discount to its book value.

Shares rise on merger fail

On paper, the proposed merger between Vietnam-focused oil and gas producer SOCO International (LSE: SIA) and Middle Eastern group Kuwait Energy had some logic. The combined firm would have had much higher production, substantial reserves and a geographically diverse portfolio.

However, the two companies couldn’t agree on terms and issued statements today confirming that the deal won’t go ahead.

SOCO shares rose by 2% in early trading as investors welcomed the clarity provided by this announcement. This stock has fallen by about 40% over the last year, even as the oil market recovered. I believe this could be a buying opportunity.

Too cheap to ignore?

SOCO’s most recent accounts show net cash of $132m and a book value per share of about 180p per share. However, I calculate that the company’s January decision to writedown the value of two non-core assets in Africa by $220m will have reduced this to about 133p per share.

At a last-seen price of 94p, it means the shares currently trade at a discount of around 29% to my estimated book value.

Supporting this value is the group’s strong cash flow. With operating costs averaging just $14 per barrel, today’s oil price of more than $60 should leave plenty of cash for development work and dividends.

Shareholders are expected to receive a total payout of 5.3p per share for 2017, giving a yield of 5.6%. A smaller payout is expected in 2018, but SOCO does have a long history of returning cash to shareholders. I believe the stock could be good value at current levels.

Will shareholders strike gold?

Russia-focused gold mining group Petropavlovsk (LSE: POG) has had a turbulent history. Its shares have lost 98% of their value since 2010 and the firm only just survived in 2015, when a big rights issue was required to help refinance $1bn of debt.

Shareholders have grown tired of the firm’s limited progress and the last year has seen the enforced departure of company chairman and founder Peter Hambro and his long-time ally, CEO Dr Pavel Maslovskiy.

A turning point?

Debt has remained stubbornly high and the group’s decision to invest in a so-called POX Hub — a specialist plant needed to extract gold from some types of ore — isn’t without risk.

However, progress is being made. Most remaining debt has now been refinanced on a more sustainable basis. Operationally, the new management team is overseeing a significant improvement in profit and cash generation.

The stock currently trades at a 43% discount to its net asset value of 12.8p per share, and on just 6.6 times 2018 forecast earnings.

If management can successfully release value from the group’s mines and operate the POX hub profitably, then I’d expect the shares to re-rate, perhaps towards the 10p-12p range. This isn’t without risk. But Petropavlovsk shares do appear to offer value at current levels.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »