2 undervalued UK shares I’d buy with £5k

This Fool picks out two undervalued UK shares that he thinks could be great investments to own in the UK economic recovery.

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As the economy continues to open up, I’ve been looking for undervalued UK shares to add to my portfolio

Here are two companies in the FTSE All-Share I would buy with an investment of £5k, based on their valuation and growth prospects. 

Undervalued UK shares

The first company I would buy is Hostelworld Group (LSE: HSW). This is a global, hostel-focused online booking platform. Its target market is passionate travellers who “crave cultural connection and unique experiences“. 

It may be the case that this section of the travel market comes back faster because its consumers are more travel-focused. As a result, they may be more willing to travel, despite the risks, considering their desire for “discovery and adventure“.

Of course, this may not be the case. The group may struggle to recover if its customers are put off by sharing rooms, which is common in hostel accommodation. There are also signs that holidaymakers are using lockdown savings to book more expensive trips. This could have an impact on the hostel business. 

Still, according to the company, domestic booking volumes have been recovering over the past few months, particularly in the North and Central American markets. I believe this trend should accelerate over the next few months as the global economy continues to open up. 

In the meantime, Hostelworld has plenty of funding to see it through. The monthly operating cash outflow is €1.6m, which is easily covered by €38.3m of cash on its balance sheet. 

That’s why I would buy this company as part of a basket of undervalued UK shares right now. 

Recovery play

The other company I would buy with my investment of £5,000 for a basket of UK recovery shares is Ted Baker (LSE: TED). Once again, this is a relatively high-risk investment. The fashion business had problems before the pandemic. And it entered 2020 in a relatively weak position. 

In June 2020, the company launched a three-year strategic transformation programme. It could be some time before this plan starts to yield concrete results, but green shoots are already emerging. 

The company has managed to reduce rent costs by around £7m in its current financial year. As a result, annualised cost savings across its business could be as much as £31m, according to its interim results announcement released at the beginning of December.

At the same time, e-commerce sales jumped nearly 42% in the 28 weeks to 8 August 2020. Although overall revenues declined 46%, the growth in e-commerce supports the company’s ambitions to become a more digital business.

These positive developments aside, the company remains in a challenging position. It reported an underlying loss of £39m in its fiscal first half. Moreover, as the pandemic has kept physical stores closed for most of 2021, it seems likely the enterprise will report a rough second half as well. 

As such, I think Ted Baker faces an uphill struggle to return to growth. However, considering the stock’s depressed price, I would buy it as a recovery investment. 

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.

Rupert Hargreaves 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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