When a company’s shares trade at a discount to its book value (the difference between its assets and its liabilities), they can look cheap. Investors, however, need to take a closer look.
Unless the firm is about to go into liquidation, the difference isn’t that important. But there are a couple of UK stocks at price-to-book (P/B) ratios below one where I think a discounted valuation to peers is a potential opportunity.
Barclays
FTSE 100 bank stock Barclays (LSE:BARC) currently trades at a P/B multiple of 0.83. By contrast, shares in HSBC, Lloyds Banking Group, and NatWest all trade above book value.
There’s a reason for this. Over the last couple of years, the bank has gone from achieving higher returns on equity than its peers to underperforming them, which might justify the discount.
| Barclays | HSBC | Lloyds | NatWest | |
|---|---|---|---|---|
| 2022 | 8.60% | 8.70% | 7.90% | 9.20% |
| 2023 | 7.50% | 12.70% | 12.00% | 12.60% |
| 2024 | 8.80% | 13.00% | 9.50% | 12.60% |
What sets Barclays apart from other UK banks is it combines a strong retail presence with a major investment banking division. And this has gone from being a strength to a weakness.
Over the last couple of years, investment banking activity has been relatively subdued. And the main reason for this is that interest rates have been higher.
The possibility of this remaining the case is a risk for Barclays. While it generally leads to wider lending margins, other banks stand to benefit more from this.
I think, however, things might be going the other way. Interest rates in the UK look set to fall, not rise, and I see this as a reason to consider buying Barclays shares at a discount to book value.
Vistry
Vistry (LSE:VTY) is a FTSE 250 housebuilder trading at a P/B multiple of 0.63. And while a number of UK construction firms trade below book value, this one stands out to me.
The reason I like the stock more than other UK builders is its business model. The firm is focusing on partnerships with housing associations and local authorities, rather than traditional building.
The big advantage of this is it’s less capital-intensive. And this shows up in its balance sheet, where inventories account for a lower percentage of total assets than its rivals.
| Barratt Redrow | Persimmon | Taylor Wimpey | Vistry | |
|---|---|---|---|---|
| Total assets (m) | £7,875 | £4,833 | £6,291 | £6,045 |
| Inventories (m) | £5,278 | £3,903 | £5,377 | £3,008 |
| Inventories as % of total assets | 67.02% | 80.76% | 85.47% | 49.76% |
In general, lower inventory levels allow a company to return more of its cash to shareholders via dividends and share buybacks. And that’s a good thing for investors.
That’s not to say there are no risks. The changing business model makes the company more reliant on relationships with partners and this is something investors should take note of.
On balance, though, I like Vistry’s asset-light business model. And as it has a bigger discount to book value than its peers, I’m looking to buy it for my portfolio.
Book value discounts
I don’t expect either Barclays or Vistry to sell off their assets and return the cash to investors. In that sense, I don’t see a discount to book value as an immediate opportunity.
I do, however, think both stocks are worth considering on other grounds. They trade at lower multiples than their peers and I’m not convinced this is justified in either case.
