Is There Hidden Value In Tesco PLC, Nanoco Group PLC & Enterprise Inns plc?

Could investors make big profits by buying Tesco PLC (LON:TSCO), Nanoco Group PLC (LON:NANO) and Enterprise Inns plc (LON:ETI)?

| 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.

The three firms featured in this article are not obvious value buys, but I believe that at least two of these stocks offer the potential for big profits at today’s prices.

Enterprise Inns

Pub chain Enterprise Inns (LSE: ETI) came close to going bust during the financial crisis, thanks to net debt which peaked at well over £3bn. Enterprise’s net debt is now down to £2.3bn and the firm’s shares trade on a forecast P/E of just 5.4. Is there hidden value here?

Possibly.

The group’s property assets are valued at £3.7bn. Yet the total value of Enterprise’s equity and its net debt it just £2.8bn. In theory, this means that a trade buyer could buy the entire Enterprise business for 24% less than the value of its property assets.

However, while net debt is falling, so is the value of Enterprise’s property portfolio. For Enterprise shares to deliver on their hidden value potential, net debt needs to fall faster than the value of the group’s property portfolio.

In other words, Enterprise’s loan-to-value ratio needs to improve. So far, it’s fallen from 66% in 2010 to 62.7% in 2015. It’s a promising start, but progress may be slow.

Tesco

Another firm with a big property portfolio and a large pile of debt is Tesco (LSE: TSCO).

The recent sale of Tesco’s Korean business means that Tesco’s net debt and the value of its property portfolio have fallen since the firm’s half-year results.

My calculations suggest that Tesco’s net fixed assets, which include property along with other long-term assets such as investments, may now be worth about £21bn. I estimate that the firm’s net debt may now be around £7bn.

As with Enterprise, we can look for hidden value by comparing the value of Tesco’s fixed assets with its enterprise value (market cap plus net debt). I estimate that Tesco’s enterprise value is currently about £21bn, equivalent to the value of its net fixed assets.

This means that unlike with Enterprise, there is no obvious hidden value in Tesco’s portfolio of property and investments.

With a 2016/17 forecast P/E of 19, Tesco stock doesn’t look cheap against forecast earnings, either. However, I don’t see any obvious reasons for the shares to fall further, so now could be a good time to start thinking about a recovery buy.

Nanoco Group

Nanotechnology small-cap Nanoco Group (LSE: NANO) is not an obvious value buy. The firm makes quantum dots and nanoparticles for use in technology such as LED displays and solar panels, but has yet to make a profit.

However, Nanoco has net cash of £24m and moved from AIM to the LSE Main Market earlier this year. The group also has some high-powered institutional investors, including Henderson Global Investors (17%) and Baillie Gifford (14%).

After years of waiting, there is now a big potential catalyst for share price growth. Commercial production of Nanoco technology by the group’s licensing partner, Dow Chemicals, is expected to start during the first half of 2016

Analysts’ forecasts suggest Nanoco could report earnings per share of 3.08p in 2016/17. That puts the shares on a forecast P/E of 16 — not expensive for a high-tech growth business.

Nanoco shares are down by 65% so far this year. Although this remains very speculative, now could be a smart time to buy.

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 owns shares of Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Warren Buffett owns this FTSE 100 stock. But should I?

Warren Buffett rarely invests in FTSE 100 shares but he does have a position in Diageo. Is it time for…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

After returning 101% in 2024 is this FTSE bank the best share to buy for 2025?

FTSE 100 bank NatWest Group turned out to be the best share to buy at the start of this year.…

Read more »

Investing Articles

Could Helium One be a millionaire-maker penny stock?

Shares of Helium One Global (LON:HE1) have soared 272% so far this year. Should I buy this penny stock while…

Read more »

Investing Articles

Are these 2 unsung FTSE blue-chips the passive income stocks I never knew I wanted?

Harvey Jones says that the FTSE 100 contains fantastic passive income stocks with deceptively modest yields. Here are two he's…

Read more »

A mixed ethnicity couple shopping for food in a supermarket
Investing Articles

Shhhh… These FTSE 250 stocks have quietly more than doubled in 2024

Forget those US tech titans. Our writer takes a closer look at two supposedly 'boring' FTSE 250 stocks that have…

Read more »

Investing Articles

As the Diageo share price flies on a double upgrade is this my last chance to buy it on the cheap?

The Diageo share price has inflicted plenty of pain on Harvey Jones in 2024, but suddenly it's serving up a…

Read more »

Investing Articles

7%+ yields! 3 choices to consider for a Stocks and Shares ISA

Christopher Ruane highlights a trio of FTSE companies each yielding over 7% he thinks investors should consider for a Stocks…

Read more »

Passive income text with pin graph chart on business table
Dividend Shares

How investors might try to turn £10,000 into a chunky passive income

Our writer Ken Hall looks at how the magic of compounding returns might help investors to create a handy second…

Read more »