The UK economy’s going through a period of change, opening up some excellent opportunities on the FTSE 100. Uncertainty around interest rates combined with stubborn inflation and supply chain issues means many promising UK shares look cheap.
Snapping up undervalued shares with growth potential is a long-trusted method that great investors like Warren Buffett swear by. With that in mind, here are two hidden gems that investors could consider for long-term gains.
RS Group
The RS Group (LSE: RS1) share price is down 14.3% this year after releasing subpar results last month. Operating profits fell 27% since May 2023 along with an 8% decline in like-for-like sales. Return on capital employed (ROCE) was also down, recording only 17.4% compared to last year’s 30.8%.
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And it’s not just this year. Since reaching a high of £12.50 in November 2021, the shares have fallen 44% to the current price of £7.01.
But it’s not all doom and gloom. Earnings are forecast to increase 14% a year, with the shares estimated to be undervalued by 18%, using a discounted cash flow (DCF) model. The economy’s already made a strong recovery this year and the industrial manufacturing sector’s growing. With RS Group involved in maintenance and repair, the company should benefit from this growth.
And with a low debt-to-equity (D/E) ratio of 46%, any profits can be safely injected back into the business to help it grow further.
Even if a recovery drags out longer than expected, I wouldn’t expect the shares to fall much more from current levels. Plus, the 3.1% dividend yield means shareholders could still net a return even if prices remain stagnant.
Intertek
The global quality-assurance specialist Intertek Group (LSE: ITRK) is in a similar position to RS Group. It’s down 14% over the past five years but has already begun to make a decent recovery this year, up 12%. Its most recent earnings results were mixed, with revenue and net income up but profit margins slightly down. Despite a mild increase, earnings per share (EPS) missed analysts expectations by 5.8%.
With earnings outperforming the share price, a DCF model estimates it’s undervalued by 9%. Consensus among analysts expects price growth of around 6.5% this year. And at least one major broker seems to agree — Berenberg put in a ‘buy’ rating on the stock last week.
But as with any investment, it’s not without risk. Its recent growth benefits from an improved economic outlook but that could easily turn around.
The upcoming UK election is just one factor that could send markets spiralling again. And while the company’s £900m debt load isn’t excessive, if it pushes the D/E ratio over 100%, profits may take a hit.
But I like its long-term prospects. Having been in business for almost 140 years, it’s a well-established firm with a strong market presence and a good reputation. As such, I suspect it could once again enjoy the strong performance it exhibited between 2010 and 2020 when it grew 377%.
