After their best income and growth ideas for 2020, these analysts reveal their favourite value plays.
A post-election sweep of cheap-looking stocks has named Redrow (LSE:RDW), Babcock International (LSE:BAB) and Balfour Beatty (LSE:BBY) among 27 under-valued companies for investors to consider in 2020.
The trio are in a group of six building stocks and three from support services as Peel Hunt's value list reflects signs that the UK is emerging from a long period of political uncertainty.
Other stocks with close ties to a potential UK recovery include aggregates business Breedon and project developer John Laing. They are joined by the likes of KAZ Minerals (LSE:KAZ), Premier Foods (LSE:PFD), Cineworld (LSE:CINE) and Pan African Resources (LSE:PAF) as Peel Hunt's value selections trade on an average 2020 price/earnings (PE) multiple of 8.9x.
Last year, the broker's value stocks delivered an average total return of 26%, compared with 19% for the FTSE All Share. Twenty-one of its selections outperformed the market in 2019, led by PureTech Health (LSE:PRTC) with a total return of 86% and followed by N Brown (LSE:BWNG) at 79%.
Despite this performance, the online fashion retailer keeps its place for this year as shares are still trading with a PE of below 7x alongside a well-covered dividend yield of 4.8%.
Redrow shares have also enjoyed a share price bounce in recent weeks as the general election result is expected to ensure continued government support for increased housing output, whilst putting a spring back into the step of house buyers.
The Deeside-based business, however, remains one of the most undervalued housebuilding stocks. This is despite a strong five-year track record that has produced the sector's third-best return on equity for 2019. It is currently trading with a forecast price to net asset value multiple of 1.3x, which Peel Hunt said represented a 25% discount to the sector average.
Analyst Clyde Lewis added:
“We continue to see Redrow as offering excellent, if not the best, value among the UK housebuilders.”
His other pick is ground engineering specialist Keller, which is viewed as an “outstanding value play” given that it is still on a 2020 PE of 8.2x after the shares bounced 50% in 2019. It generates less than 5% of its profits in the UK, with the company much more exposed to the US construction cycle.
The complexity of some of Keller's projects has resulted in erratic earnings over the past decade, but Lewis is hopeful that new chief executive Michael Speakman can make the group simpler and more robust.
Babcock International also looks to be turning a corner, according to Peel Hunt analyst Christopher Bamberry. The shares have underperformed for a number of years and are currently at a 30% discount to the aerospace and defence sector and 49% discount to the support services sector after a series of downgrades.
Underlying forecasts now appear to have stabilised and there are signs of momentum in the bid pipeline and order book. Bamberry said Babcock was better placed than it has been for a number of years, with the company due to return to revenue and profit growth in 2021.
At Balfour Beatty, Peel Hunt said shares look well placed for “material outperformance”, aided by a shift to higher margin work and more attractive markets.
- Six speculative UK share ideas for 2020
- You can also invest in UK equities via ii’s Super 60 recommended funds. Click here to find out more
Analyst Andrew Nussey said the shares had de-rated despite management de-risking the investment case. He added:
“Medium-term earnings expectations look relatively undemanding given the operational progress, beneficial mix shift and robust market backdrop both in the UK and US.”
The other stocks on Peel Hunt's value list for 2020 are Bakkavor (LSE:BAKK), Capital & Counties (LSE:CAPC), Draper Esprit (LSE:GROW), Eurocell (LSE:ECEL), Go-Ahead Group (LSE:GOG), John Menzies (LSE:MNZS), NCC (LSE:NCC), NewRiver REIT (LSE:NRR), Norcros (LSE:NXR), Polar Capital (LSE:POLR), Serica Energy (LSE:SQZ), Spire Healthcare (LSE:SPI), Ten Entertainment (LSE:TEG), TI Fluid Systems (LSE:TIFS), Trifast (LSE:TRI) and Volution (LSE:FAN).
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.