With the FTSE 100 recently hitting new highs, finding cheap UK shares is becoming quite the challenge. Value investors might be feeling a bit squeezed as many of the UK’s major blue-chip shares look overvalued.
But the FTSE 250 is still harbouring some hidden gems. B&M European Value Retail (LSE: BME), which crashed 30% this past month, is looking particularly enticing.
However, cheap doesn’t always mean good value. If a business is falling apart due to poor management or dwindling demand, it might be a value trap. That’s why it’s crucial to ‘look before you leap’ when picking stocks.
A closer look
A peek under the bonnet reveals some concerns. Earlier this month, B&M cut its full-year 2025 profits forecast, now expecting adjusted EBITDA ranging £470m and £520m, down from the previous £510m-£560m estimate.
On top of this, CFO Mike Schmidt is stepping down amid a third-party review of financial matters commissioned by the board. Analysts have reportedly described the company’s credibility as being under pressure. These developments leave some big questions about its future and, depending on outcomes, profits and investor confidence could suffer.
On the plus side, group revenue rose 3.7% in FY25 to £5.571bn, with adjusted operating profit broadly flat at £591m. The business is also expanding in France, delivering 5.2% like‐for‐like growth, according to its most recent trading update.
The bull case for value investors
Despite the profit update, major brokers have not been deterred. It seems that many view these issues as a mere blip. Deutsche Bank, Shore Capital and Canaccord Genuity have all initiated Buy ratings after the recent crash. Their price targets range from 230p to 250p — a decent jump from the current 185p level.
In fact, the 12-month price target from 17 analysts averages 282p, suggesting a potential 51% rise. If those forecast prices materialise, this could pan out to be an excellent opportunity for value investors willing to take the leap.
Metrics back up the forecasts, with the stock now looking highly attractive from both an income and value perspective. The price drop has boosted its dividend yield to a tempting 8.1%, while the forward price-to-earnings (P/E) ratio sits around 7.7. Those metrics are hard to ignore, even for the most cautious of investors.
My verdict
While the numbers and forecasts look good, B&M is not in the clear yet. Its share price has been on a downward slope for nearly two years and since the pandemic, debt has increased by 20%, while free cash flow has dipped almost 40%.
If the company can’t find a way to reverse its fortunes, those optimistic broker forecasts might not pan out.
For investors willing to take a calculated risk, B&M could offer a rewarding turnaround opportunity. Personally, I’m keen to see how the company’s next earnings report unfolds before making any moves.
Still, it’s a stock to consider for investors hunting for affordable UK shares with high income potential. As always, weighing up the risks and the company’s recovery prospects is critical before making any decisions.
