Global markets have sunk in recent weeks, with inflationary pressures and recession risks weighing down sentiment. However, this has left several possible bargains among UK shares. How can I tell if they’re true bargains though? Well, one way to value a stock is by looking at its book value in comparison to the company’s valuation.
Book value is calculated by taking away the company’s liabilities from its assets and in theory, if a company stopped trading and sold all its assets, it would be left with its book value. When the book value is higher than the valuation, it’s a sign a stock may be undervalued. It’s not definitive, but it can be a very important metric. After the recent market sell-off, here are two bargain UK shares trading at less than book value I’d add to my portfolio.
Beaten-down travel stock
I’m a fan of National Express (LSE: NEX) and after its 35% fall over the past year, I feel it’s now too cheap for me to miss. At the end of 2021, the group had a book value of £1.45bn, whereas it currently has a market capitalisation of £1.1bn. That means the share price is trading at a 24% discount to its book value and signals that the shares are in deep value territory.
There are several problems facing the transport operator today. Due to US wage inflation, the group expects its recovery in profitability to lag its revenue growth. Margins are expected to be only around 7% in 2022, lower than the 9% target. Longer term, if oil prices remain high, this could drive company’s costs even higher and would put more pressure on margins.
However, I remain optimistic about the future for this UK share. For one, with the current cost-of-living crisis, it’s likely that consumers will want to switch to lower-cost transport. National Express could be one of the best options.
Further, the group is confident it can deliver £1.25bn of free cash flow between 2022 and 2027. This cash will be partly reinvested into growing shareholder returns, and the dividend is expected to be reinstated after the FY2022 results. For these reasons, I’ll continue adding National Express shares to my portfolio.
Heavily-shorted UK stock
ASOS (LSE: ASC) is another company trading at less than book value. As of 28 February, the stock had a book value of £1.05bn, but a market cap of £900m. It means the shares currently trade at a discount of 14% to book value, implying bargain territory.
The current macroeconomic environment has caused problems for the fast-fashion retailer, however. For example, it recently downgraded earnings expectations from £125m to between £20m and £60m. This saw the share price plunge around 30% on the day. It also explains why ASOS is one of the most shorted UK shares, just after Cineworld. This is another bearish sign.
Despite these worries, I’m still tempted to open a small position in ASOS. For example, as noted by Barclays, there are “green shoots in the US market”, where the company saw 21% year-on-year sales growth. With a customer base of 27m, I also feel like its long-term future is bright, especially when inflationary pressures start to die down. Therefore, I may use the group’s discount to its book value as a sign to buy.
