It’s not often that you get the chance to buy shares in a company trading on six times forward earnings and on a 45 per cent discount to book value. This is the case with the business that Simon Thompson has investigated in his latest IC Alpha report. Since Simon filed the report, this company is now even cheaper thanks to the market sell-off.
Of course, when markets sell off there is the old adage about falling knives to consider, but with earnings risk skewed to the upside and free cash flow improving, this is a quality business to keep a watch on. It is on track to pay down all its borrowings by the end of 2020 and should have enough cash left over to maintain a progressive dividend policy that has seen the pay-out raised by 70 per cent since 2013.
Simon explains that, although this business operates in a cyclical industry, the discounted valuation offers a considerable margin of safety were the UK economy to slide into recession: “There is risk involved undoubtedly, there always is, but the equity premium embedded in the current valuation is simply too high.”
The possibility this company will pay off its debt, is another reason Simon likes the investment opportunity: “if all debt is paid off over the next couple of years then ownership of the enterprise is being transferred from debt holders to equity holders. Given net debt equates to 16 per cent of EV [Enterprise Value], then you get a natural share price kicker built into the price for free.”
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