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4 Dirt Cheap Takeover Targets Promising Huge Returns: Carclo plc, Carpetright plc, McBride plc & Huntsworth plc

It takes courage and nerves of steel to invest in Carclo (LSE: CAR), Carpetright (LSE: CPR)McBride (LSE: MCB) and Huntsworth (LSE: HNT) these days — four small businesses, whose shares have been under immense pressure for months.

I thought I’d flag them this week because a few elements point to the possibility that they may be taken over sooner rather than later. 

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Carclo: A Break-Up Story? 

Carclo caught my attention because: a) it has recently appointed Peel Hunt as joint broker; b) it has restructuring/break-up potential; and c) its shares have lost 66% of their value this year. 

Carclo designs and manufactures technical plastic products. It has a market cap of £61m and an enterprise value (market cap plus net debt) of about £90m. Its shares trade at about 1x sales and 7x EBITDA, which are fair trading multiples for such a business.

Earlier this month, it said its loss-making coated film business, CIT Technology, which is the smallest of its four divisions, contributed to hefty impairment charges. A strategic review of CIT is underway and a decision will likely be taken by March 2015. What counts is that the other three divisions offer value to buyers looking for break-up candidates, in my view. 

Carpetright: Not Too Bad

Carpetright caught my attention because: a) its stock trades at the lows for the century; b) its founder, Lord Harris, who has been selling shares this year, retired at the end of October; c) forecasts for revenue, EBIT and earnings aren’t too bad; and d) the company has little debt on its balance sheet. 

Carpetright sells beds and carpets from more than 600 outlets in the UK (85% of revenue), Belgium and Netherlands. Is it about to turn the corner after a couple of very difficult years with combined net losses of £10.2m?

This is not an easy call. 

A string of profit warnings have contributed to value destruction in the last 18 months. I wouldn’t buy the stock solely based on bullish forecasts, but the shares are dirt cheap right now and Carpetright could certainly become a successful turnaround story under new management. Private equity stewardship is needed. Carpetright has a market value of about £200m and virtually no debts. 

McBride: A Tough Environment

McBride’s 2014 annual report is entitled “Adapting in a changing environment”. That says it all, really. The company manufactures and sells private label household and personal care products.  

McBride caught my attention because: a) it operates in a sector that needs consolidation to preserve profit margins; b) divestments could boost the company’s market value; and c) its shares are sliding, and trade around their 10-year lows.

A bullish (but perhaps unrealistic) stance on the outlook for supermarkets — McBride’s core clients — could spur interest from trade buyers in a sector where large and small players must improve returns. UK sales are under pressure, but the majority of McBride’s sales are generated in Western Europe, which, although troubled, has been holding up relatively well in the last couple of years. Size-wise, it is similar to Carpetright, although its balance sheet carries much more debt.  

Huntsworth: More Upside Than Downside? 

The shares of Huntsworth, one of the biggest independent PR companies in the UK, have bounced back by 16% in the last week of trading, but they are still 30% below the 2-year high they hit in mid-April.

Huntsworth has drawn my attention because: a) its equity valuation may benefit from a comprehensive restructuring round; b) it has recently appointed Derek Mapp as chairman of its board; and c) its portfolio of assets and geographical mix could attract opportunistic buyers from Asia. 

It has a market cap of £168m. I think the most obvious outcome would a take-private deal, although net leverage must go down first.  As a public company, Huntsworth may find it very difficult to deliver value to shareholders. Any further weakness in its stock price should be noticed by investors and suitors as well.

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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