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4 Of The Cheapest UK Companies Right Now

Screening for value in the UK universe, four companies emerge: FirstGroup (LSE: FGP), Rentokil (LSE: RTO), Royal Mail (LSE: RMG) and Thomas Cook (LSE: TCG).

What do they have in common? Not much operationally, but their enterprise values are higher than £3bn and their valuations, based on cash flow multiples, are among the lowest in the UK world. These four companies are not necessarily a bargain, but they certainly deserve attention, particularly if recent trends are confirmed.

FirstGroup

FirstGroup is a transport operator in the UK and North America. When it launched a reparatory rights issue in May 2013, its stock plummeted, yet proceeds from a cash call were absolutely necessary in order to cut a huge debt pile.

Its net leverage has dropped from 3.6 times to 2.2 times in the last year or so and, as a result, its capital structure has become more solid. In the last 18 months, investors had to digest the mess surrounding the loss of the West Coast Main Line rail franchise and a dividend cut. Is the worst behind FirstGroup?

In spite of a rally of about 40% since early June 2013, FirstGroup’s stock still trades miles away from its five- and three-year highs. FirstGroup is dirt cheap for good reasons: revenues are expected to decline and its interest cover ratio is the lowest in the UK. It’s a takeover target as well as a break-up candidate; these elements are not priced into the stock.

Rentokil

Rentokil provides a wide range of business services across Europe and around the world. It is not the most obvious investment in the current environment, but its operating performance has markedly improved in the last couple of years.

Equally important, Rentokil has room to become a leaner machine. Last year it sold City Link parcels business for £1, which signals a commitment to divest problematic assets. Surely, more growth is needed to boost its valuation. Rentokil’s dividend yield is not particularly attractive, but its cash flow profile is decent and debts are manageable.

Royal Mail

Recent weakness in Royal Mail’s stock provides an opportunity to bet on a business whose fundamentals have greatly improved in the last 12 months. The threat posed by rivals is real, particularly in the parcel-delivery market, but its free cash flow profile is solid, leverage is low, and profitability could be on its way up.

The stock, whose price is still well above IPO, is down 10% this year. Further weakness shouldn’t be ruled out, but if Royal Mail manages to keep competition at bay its valuation will almost certainly rise.

Thomas Cook

Thomas Cook is the second-largest tour operator in Europe. When the credit crunch hit in 2008, the company nearly collapsed under a massive debt load. In recent years, it has proved to be a remarkable turnaround story. Still, additional divestments are needed to render it a valuable business proposition.

It has reported losses for several years now, and it doesn’t look like it’ll be in the black anytime soon. Luckily for shareholders, Thomas Cook boasts a large group of lenders, which have played a pivotal role in rescuing the travel agent.

On May 15, its stock dropped 12.8% following the announcement of a cost-saving plan that caught analysts off guard. It is fairly valued at £1.60, where it currently trades. Much of its fortunes depend on how the broader market performs, rather than on fundamentals.

 The Search For Value

Telco giant Vodafone and miner Vedanta are similarly cheap, but I wouldn't touch them.

You can hedge risk by carefully selecting value stocks identified in our latest report, which highlights the danger of a bull trap. We offer plenty of choices with regard to the sector and the risk profile of the investment you require. We have also looked at recent IPOs and how they have performed. And we suggest alternative investments that could yield market-beating returns.

Moreover, we answer a key question: where is the smart money heading next?

Alessandro doesn't own shares in any of the companies mentioned.