Today I’m going to take a look at three companies I believe offer old-fashioned hidden value. In my opinion, each of these firms could deliver 30-50% gains over the next year or two.
Home Retail Group
Shares in Argos and Homebase owner Home Retail Group (LSE: HOME) have fallen by 50% this year as sales fell at both Argos and Homebase.
Both store chains are now mid-way through transformation plans aimed at boosting sales and cutting costs. However, as a value investor, what I find most interesting is the way the market is currently valuing Home Retail Group.
Home Retail operates a financial services business, which allows the group’s customers to buy items on credit. The financial services division had net assets of £589m at the end of August. In addition to this, Home Retail had net cash of £193m. Combined, the value of these fairly marketable assets is £782m.
At the time of writing, Home Retail’s market capitalisation is just £817m. Buyers at today’s 100p share price are effectively getting Argos and Homebase for almost nothing, alongside a chunk of cash and loans.
If the Argos and Homebase turnaround plans are successful, I’d expect Home Retail shares to rise significantly to reflect the value of these major retail chains. Of course, the retail turnaround could continue to disappoint. Home Retail’s net cash could be spent with little to show for it.
On balance, however, I believe Home Retail shares could be a compelling medium-term buy for value investors.
Lamprell
Oil rig builder Lamprell (LSE: LAM) reported net cash of around $300m at the end of June. Although the firm is facing an uncertain outlook in common with the rest of the oil and gas industry, this Dubai-based business does have some advantages.
Some of Lamprell’s biggest customers are Middle Eastern oil companies with low-cost production. They appear to be mostly likely to continue investing in the current market environment.
A second advantage is that Lamprell has plenty of cash to weather the storm. It also has recently-modernised dockyard facilities. My only real concern as a shareholder is the surprise departure of the firm’s chief executive, James Moffatt, who will be leaving at the end of June 2016 after just three years.
Despite this, Lamprell still seems an attractive buy to me. The shares trade on less than 10 times earnings and dividend payments are expected to restart this year.
Barclays
The value appeal of Barclays (LSE: BARC) is simple. At the current price of around 225p, the shares trade on 23% discount to the bank’s net tangible asset value of 289p per share. A more typical valuation would be slightly above net tangible asset value.
Of course, there is a risk that this discount is justified. Barclays may have more undiscovered bad assets and could face further losses. But more than seven years after the financial crisis, I think this is increasingly unlikely.
My view is that as Barclays’ profits and dividend payments recover, the shares are likely to gradually rise to reflect the bank’s book value. If I’m right, Barclays shares could offer 30% upside from today’s prices.
In the meantime, Barclays’ shares trade on 8.6 times 2016 forecast earnings, with a prospective yield for next year of 3.8%. I think they’re worth a closer look.
