One way to reduce the risks associated with less forgiving markets is to ensure you buy companies at the right valuation. With this in mind Shares has conducted a screening exercise of the market to identify stocks which in our view are too cheap and therefore represent attractive investment opportunities.

After running the numbers on discounted stocks with earnings momentum and firms which look cheap relative to their cash flow, the Shares team did further research, identifying five companies which have the right qualities and catalysts to provide confidence they will not remain undervalued indefinitely. Keep reading to discover our selections.

Central Asia Metals

(CAML:AIM) 235p

Over time Central Asia Metals (CAM:AIM) has built a track record of delivering consistent cash flow from its low-cost operations. This in turn underpins generous dividends. We think a negative share price reaction to a mixed set of 2022 results has created an attractive opportunity to buy the stock at a good price.

Based on consensus forecasts for 2023, Central Asia offers a dividend yield of 6.4% and trades on a price to earnings ratio of eight times. Its longstanding policy is to pay 30% to 50% of operating cash flow, less capital expenditure.

The company has two main assets: Kounrad where it reprocesses old mine waste to recover copper and has a licence to run the project until 2034; and Sasa, a lead/zinc mine in North Macedonia.

Numbers for 2022 were hit by a $55.1 million impairment charge at Sasa thanks to lower volumes, higher costs and lower lead prices. However, the company ended the year with cash of $66.1 million and the dividend was flat at 20p, representing 47% of cash flow.

Investment bank Berenberg comments: ‘We would look through the impairment and focus on the underlying quality of the assets, and the strong free cash flow generation and dividends from the company.’

Central Asia Metals is on the lookout for acquisitions to drive growth, backed by its strong balance sheet. Berenberg believes a potential target could be the Carajas copper-gold assets in Brazil, currently held by OZ Minerals (OZL:ASX).

Large miner BHP (BHP) is set to complete a takeover of OZ Minerals in the near term and Berenberg believes these assets are too small to be material for BHP.

It concludes: ‘We think that Central Asia Metals, with strong earnings and free cash flow generation and an under-levered balance sheet, is well placed to bid for these assets, which are guided to produce 13-16,000 tonnes of copper and 11-13,000 ounces of gold in 2023.’

Central Asia provided production guidance for 2023 of between 13,000 and 14,000 tonnes of copper, 19,000 to 21,000 tonnes of zinc-in-concentrate, and 27,000 to 29,000 tonnes of lead-in-concentrate. [TS]

Kitwave

(KITW:AIM) 274.5p

Independent food and drinks wholesaler Kitwave (KITW:AIM) looks like a bargain relative to its growth potential and the quality of the business.

The shares trade on 10.6 times expected earnings per share to October 2023 and a dividend yield of 4% according to analysts at Canaccord Genuity which looks stingy against a forecast 13% growth in sales and 24% increase in expected pre-tax profit.

Since the company floated on the AIM market at 150p per share in May 2021 analysts have had a hard time keeping up with the growth in the business which has resulted in a strong increase in earnings revisions. This is usually a good precursor of share price outperformance.

For example, adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation) for the financial year ended 31 October 2022 doubled to £29.5 million which is 40% ahead of Canaccord Genuity’s estimate made at the time the company joined the stock market.

Growth in 2022 was driven by recovery from the pandemic as volumes and trading conditions improved which contributed to organic growth in sales of 27% driven by price (up 16%) and volume (up 12%).

The acquisition of MJ Baker added a further 5% to sales growth for the year. Management said growth has continued into the first quarter of the 12-month period to 31 October 2023 which bodes well for the rest of the year.

Kitwave sells and delivers everything from confectionery, soft drinks and snacks to tobacco, beers, wines, groceries, and frozen and chilled food, delivering to a diverse 38,000-strong UK customer base spanning convenience stores, pubs, vending machine operators and foodservice providers.

The company’s competitive advantages include an extensive depot network facilitating next-day delivery within 25 miles of a depot and three-day delivery slots nationwide.

And the company typically carries 23 days of stock to ensure it can fulfil orders even in the event of inbound supply chain delays. Over the last 35 years the firm has built relationships with market leading suppliers to drive product allocation advantages.

Kitwave’s strategy is to complement organic growth with bolt-on acquisitions in a highly fragmented market. It has a successful track record of acquiring and integrating businesses.

The company believes it has a significant market opportunity to continue growing its roughly 2% market share. [MG]

Marks & Spencer

(MKS) 157.7p

Despite participating in the broader sector rally which started towards the back end of last year, British retail bellwether Marks & Spencer (MKS) remains lowly valued and is attracting positive earnings revisions from analysts.

Marks & Spencer has rediscovered its mojo, having built on better-than-expected festive trading by announcing a near half a billion-pound investment to open new stores that the FTSE 250 firm says is ‘core’ to its aim of becoming the UK’s leading omnichannel retailer. In the face of a tough consumer backdrop of high inflation, rising interest rates and a cost-of-living squeeze, Marks & Spencer’s Christmas trading update (12 January 2023) confirmed positive momentum with the retailer gaining market share in food, clothing and home in the 13 weeks to 31 January 2023. Like-for-like food sales increased by 6.3% as Marks & Spencer not only outperformed the market but generated its largest ever Christmas sales.

Clothing and home like-for-like sales grew by 8.6% as the firm’s market share topped 10%, its highest level in seven years. The outlook for the consumer is less bad than feared, with UK unemployment remaining subdued and consumer confidence lifting from lows, while cost and currency headwinds are easing for the FTSE 250 shopkeeper steered by CEO Stuart Machin.

Accordingly, Shore Capital has upgraded its year to March 2023 pre-tax profit forecast by more than 6% to £431 million for EPS (earnings per share) of 15.9p, and upped its 2024 pre-tax profit estimate by more than 30% to £415 million, implying EPS of 14.5p. Based on these estimates, Marks & Spencer trades on a grudging forward price-to-earnings multiple of 10.9 for this year falling to a single digit 9.7 times based on the broker’s 2025 pre-tax profit and EPS estimates of £460 million and 16.2p. Shore Capital also points out Marks & Spencer now has ‘a sound balance sheet with good liquidity’ and has even shaded in a return to the dividend list with a 3.5p payout for the year just-ended. ‘Share gains and margin expansion will need to be the key levers of M&S’s future earnings in low growth UK clothing and food markets,’ said the broker. [JC]

Morgan Sindall

(MGNS) £16.64

A rating of just 7.4 times consensus forecast 2023 earnings is too cheap for a company with Morgan Sindall’s (MGNS) qualities. Once you factor in a generous dividend yield of 6.2% the value opportunity looks very compelling.

Granted the construction backdrop is not overwhelmingly positive but its involvement in infrastructure and regeneration projects means it is active in areas with robust dynamics, particularly in the medium term.

The company has seven businesses operating across five different areas: construction and infrastructure, office fit-out, property services, partnership housing and urban regeneration. A decentralised structure enables individual parts of the group to make their own decisions and drive innovation in their respective markets.

The company is seeing strong demand in fitting out offices as working spaces are reconfigured to make them fit for new requirements coming out of the pandemic and fresh environmental standards.

While the fit-out arm has limited earnings visibility, the other parts of the group benefit from long-term contractual relationships which make their revenue streams relatively predictable. On this basis, investors can have some confidence in forecast earnings growth of 8% for 2023.

We like the focus on organic growth, the habit of being conservative with guidance and the transparency of its results which typically only have a few exceptional items. The company can also count a strong management team, with chief executive John Morgan a founder of the company who also served as chair before returning as boss in 2012, and an impressive track record, among its attractions. In summary, Morgan Sindall ticks all the boxes you would want from a public company.

Numis analyst Jonathan Coubrough says the company has ‘high medium-term organic growth potential, backed by an average daily net cash position equivalent to a third of the market cap’.

As at the beginning of 2023, net cash totalled £355 million. This financial strength should help support a growing dividend, with the pay-out hiked 10% when the company announced its full year results on 23 February. [TS]

Redde Northgate

(REDD) 348p

It’s rare for mergers to add value for investors, as typically the talked-about ‘synergies’ and cross-selling opportunities fail to live up to expectations, but in the case of van hire and insurance services group Redde Northgate (REDD) bringing the two firms under one roof has been an unqualified success.

The group has its own fleet of over 130,000 vans for rent in the UK and Spain and manages over 600,000 vehicles for other firms, making it one of the biggest vehicle operators in Europe.

In addition, it offers a full range of ‘vehicle lifecycle’ services from managing accident claims to recovery, repair, maintenance, disposal and even advising on the EV (electric vehicle) transition.

Its scale and its integrated platform means it can cater to the increasing number of businesses who want to outsource management of their fleet.

In the six months to the end of October 2022, revenue excluding vehicle sales jumped 20% to £628 million, above market expectations, with just over half of group turnover coming from the claims and services business.

Profit from the rental business rose 11% to £54 million, despite a restricted supply of new vehicles, while profit from the service side rose over 16% to £70.4 million as traffic levels returned to pre-pandemic levels and several large new wins contracts kicked in.

The firm’s access to LCV (light commercial vehicle) manufacturers and improved supply means it can take on more customers, both private and corporate, while a scarcity of garage repair capacity and the desire for a cost-effective outsourced solution is driving more business its way.

The firm suggested at the half-year stage that full-year trading would be ‘modestly’ ahead of forecasts, leading analysts to upgrade their estimates and price targets for the stock.

Numis has a fair value of 500p on the shares and highlights the low valuation and attractive dividend yield, while Barclays has a 556p price target and sees ‘good scope for further underlying growth’ due to revenue synergies and market share gains for Redde ‘which should drive improving returns and a further re-rating’. Currently the shares trade on 6.6 times forecast 2023 earnings and yield 6.7%. [IC]

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