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.

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

Smart young brown businesswoman working from home on a laptop
Investing Articles

These 2 UK shares could help me reach £1,000,000 in my Stocks and Shares ISA

A FTSE 100 compounding machine and a FTSE 250 value stock are the UK shares Stephen Wright thinks could help…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

If I’d invested £1,000 in Lloyds shares at the start of the year, here’s what I’d have now

The stock market is unmoved, but Stephen Wright thinks last year’s record profits might give Lloyds shares a long-term boost.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

I’ll snap up shares in this growth stock in March if others don’t get there first

This Fool says shares in this growth stock are stable, full of profit, and might be undervalued. But there are…

Read more »

Rainbow foil balloon of the number two on pink background
Investing Articles

My 2 top energy investment trust picks for a passive income

I'm aiming to buy more of these investment trusts for a passive income and the reasonably stable energy sector returns…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

5.5% dividend yield! Shares like these could be great for my retirement

Oliver Rodzianko thinks this company with a stellar dividend yield could be very useful when looking for income from his…

Read more »

Investing Articles

Should I buy this FTSE 250 stock as it soars back to the FTSE 100?

This FTSE 250 stock has rallied following its pandemic woes. This Fool thinks now could be a good time to…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

How I’d aim to transform an empty Stocks & Shares ISA into £1m of wealth!

There's never a better time to start investing in a Stocks and Shares ISA than today. Here's how I'd aim…

Read more »

Close up of manual worker's equipment at construction site without people.
Investing Articles

Investing £14,708 in this FTSE 100 stock could earn me £1,000 per year in passive income

Is a CMA investigation into anticompetitive practices the cloud cover Stephen Wright needs to start buying shares in a FTSE…

Read more »