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?

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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.

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