Other Value Opportunities from UK

There are many ways to estimate the right share price and try to find undervalued stocks. One of the clearest and most effective way is Ben Graham’s Net Current Asset Value strategy. It is easy to count and if you want you will find a screener which will do the work for you. Sometimes you will find more companies, sometimes less. If you want to expand the number of the companies to choose you have to use also other metrics.

I have done following research using some other metrics. In this research the most important single valuation ratio was EV/EBIT. Recent examinations have shown that as a stand-alone ratio EV/EBIT is probably more profitable than any other valuation ratio. I also checked P/E ratio, P/B ratio compared to Return on Equity and P/S ratio compared to Net-margin. I don’t want to touch to heavy leveraged companies. Financial risk of the companies should be as low as possible. I looked at Debt to Equity levels. Then F-Score told me how financial strong and healthy these bargain stocks were and finally Z-Score tells how distress company is and what is the risk of bankruptcy.

After these more or less quantitative measures I have done also short quality appraisal of the companies and their business. Observations of these quality checks you can find in connection with business analysis. This time my research covered mainly big Western markets and, it’s funny, in the end I made all discoveries from the one country and from the one industry.


Homebuilding industry in United Kingdom

Homebuilding and construction industry is extremely cyclical. Surely in the future there will be a booms and busts. Recent economic data has been favorable for the homebuilders. Favorable government policies in UK and pent-up demand outweighing supply and helped this industry. This industry sector is highly competitive and the business is commodity-like determined by the laws of supply and demand. However, there are many future trends that will support the industry. Everywhere people are moving to cities and need more houses. The number of people living as single family will increase significantly. Urban areas expanded and because of developing of technology suburban living conquer the field. People do not need to go to the city center at work or taking care of other things every day. Also all kind of transportations are getting cheaper. But last year Brexit vote hurt the sector and some companies plunged violently. Now investors need to weigh up whether or not the market is incorrect in its assumption that the sector’s high-returning days are numbered.

Before diving company analyses I need to mention that one of my criteria, P/E ratio, can be misleading used with strongly cyclical stocks. Many times they are cheap when P/E ratio is high and vice versa. So be warned.


Abbey PLC

Abbey PLC is engaged in building and property development, plant hire and property rental business. The Company operates in Ireland, the United Kingdom, and the Czech Republic. Abbey’s housebuilding division completed 252 sales during the half-year, with 219 in the UK, 18 in the Czech Republic and 15 in Ireland.

The immediate outlook continues to be good and a strong second half of 2016 should allow physical activity to surpass last year. In England, uncertainty is affecting sentiment and this may impact the business in 2017. Although UK business is by far the most important, Czech Republic can provide opportunities for expansion in the future.


Market Cap      256.2 M

EV/EBIT             3.8

P/E                      7.2

P/B                      1.1         Compared to ROE                     16.4 %

P/S                      1.5         Compared to Net-margin      21.8 %

Debt to Equity 0.0

F-Score              8

Z-Score              6.34


The company has grown fast in recent years. The big question is can growth continue at this rate? Prospects for the short, medium and long term are now very unclear. Even if growth does not continue in the same way, company should earn steady 1.50-1.70 per share and when market price is £12.00, Abbey is not expensive. Profitable and growing company should be valued higher than its book value. There is also much room to increase dividends. Payout ratio is 0.10 and yield is 1.00 %. We have to remember that company is debt free and balance sheet is strong.

Abbey is tight Gallagher family owned (74 % Gallagher Holdings Limited). Charles H. Gallagher bought last 376,044 shares of the company 21st December 2016 and 985,645 shares dated 20th January 2017.



Bellway PLC is a is a holding company. It is engaged in the business of building houses in the United Kingdom. The Company provides bedroom apartments to luxury penthouses and executive houses.

A Newcastle, England-based company is among the biggest homebuilding businesses operating across the United Kingdom. Company’s sales are spread throughout the country with products ranging from one bedroom apartments to luxury penthouses. As the UK homebuilding industry is flourishing the market had been in its favour, helping the group to trade well.

Bellway notched up its seventh successive year of volume growth. Shareholders were rewarded with a 40 percent hike in the dividend payout, which is not meaningless.


Market Cap      3.05 B

EV/EBIT             5.9

P/E                      7.6

P/B                      1.6         Compared to ROE                     13.5 %

P/S                      1.4         Compared to Net-margin      18.0 %

Debt to Equity 0.02

F-Score              7

Z-Score              5.29


Bellway is growing all the time. It should easily reach 3.50 earnings per share level, which means 14 % earnings yield. Dividend yield is great 4.4 % and dividend growth during the past years has been enormous. Payout ratio of 0.25 % helps to believe in that dividend growth is not questioned. Balance sheet is strong, but cash flow – although increasing – could be larger. Fast rising net margin proves the excellent profitability of the company. It really looks like that all the good things are not priced yet. The company is broadly owned by institutional investors.


Bovis Homes

Bovis Homes Group manages full range of housing development activities. It is engaged in designing, building, surveying, purchasing and selling of new homes for private customers and Registered Social Landlords, mainly in England and Wales.

The housebuilder’s boss, David Ritchie, has announced his immediate departure from the company, following a disappointing pre-close update sent just before the year-end. There has also been reputational challenges with unhappy customers. We can also find media reports that Bovis allegedly paid incentives to persuade buyers to move into unfinished homes.

Bovis has dragged on its return on capital, which is among the lowest of its peers. Recently the company has made progress on increasing its return on capital, particularly by increasing the hurdle rates for land purchases. This should pay off over the longer term.


Market Cap      1.14 B

EV/EBIT             6.6

P/E                      8.5

P/B                      1.2         Compared to ROE                     14.3 %

P/S                      1.2         Compared to Net-margin      13.3 %

Debt to Equity 0.02

F-Score              6

Z-Score              3.64


There are lot of pressure and bad news regarding the company. However, investors should concentrate the facts. Maybe you should wait full year 2016 financial report to see how revenue and earnings have developed. Bovis already revealed that volume delivery for 2016 would be lower than previously expected. Bovis met that downturn with a much stronger balance sheet than its peers, but has since struggled to rebuild its profitability. If there is not more bad news, any good news may push the share price up quickly.


M Winkworth

Ok, the last company operates in real estate service business.

M Winkworth is engaged in franchising the Winkworth estate agencies. Its operations occur in the UK, with limited business in other territories. The Company also offers additional products such as financial services, auctions, surveying and commercial property sales.

The business model works on a franchised basis, with each independent outlet paying a percentage of revenue in exchange for using the M Winkworth brand and other services.

Some uncertainty continues to weigh on transactions as some sellers withdraw from the market with the intention of reviewing their situation during the 2017. However, the fundamentals of the housing market in London and its surrounding areas remain strong.


Market Cap      12.48 M

EV/EBIT             5.1

P/E                      8.2

P/B                      2.3         Compared to ROE                     30.5 %

P/S                      2.1         Compared to Net-margin      26.0 %

Debt to Equity 0.0

F-Score              3

Z-Score              11.69


After the profit warning announcement in November 2016 revenue and earnings are under the pressure. Long term outlook of the Company does not look so bad. M Winkworth is debt free and as a whole financials are ok. So what’s the reason for fading market price? At least there are two main factors: (1) Market hates uncertainty and you can see it in the share price. (2) The ownership structure is another reason. The number of shares not in public hands represents 50.3% of the issued share capital. Chairman Simon Agace and his family controlled the company. Anyway insiders are increasing their stake all the time. In spite of these shortcomings M Winkworth’s undervalued stock offers an interesting opportunity for enterprising investor.

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