A tough trading environment for Acal Plc (LON:ACL) has taking the froth off the customised electronics supplier’s valuation, Peel Hunt asserts.
In a trawl through second and third-line stocks, looking for undervalued shares, Acal was first on the list – albeit for alphabetic reasons.
The broker was specifically looking for stocks that are valued below the average for the UK mid/small cap universe on a combination of EV/EBITDA – that’s enterprise value (essentially market capitalisation adjusted for cash or debt) divided by underlying earnings – and price/earnings (PE) ratio metrics.
Acal fits the bill on both counts.
During the summer of 2015, Acal’s shares were trading on a PE ratio of 17, whereas based on the consensus forecasts supplied by Thomson IBES, that ratio has fallen to 11.3 times projected earnings for the year to the end of March 2018.
The EV/EBITDA ratio is 7.7.
“The reasons for the slip are understandable – a tough, uncertain trading environment which culminated in a larger than expected decline in organic revenues in H1 2017E – and were exacerbated by relatively low liquidity; however, these pressures are likely to subside this year, in our view,” Peel Hunt’s Henry Carver said.
“The consolidation story (integral to the growth strategy) is still as compelling as it has ever been, both in Europe and further afield, and organic growth looks set to benefit from better than expected indicators for industrial production,” Carver suggested.
In the analyst’s view, Acal is now one of the best ways to play a European recovery.
Another Proactive Investors favourite tipped to revert upwards to the mean is Eland Oil and Gas PLC (LON:ELA).
Eland is one of Peel Hunts three ‘top picks’ in the oil and gas sector for the first quarter of 2017.
It enjoys something called Pioneer Tax status in Nigeria, which means Eland won’t be paying tax until May 2019, so any increase in production does wonders for cash generation.
Back in November, Eland said it expects production from the Opuama field to be around 14,500 barrels per day, following a flow test on the Opuama-3 well.
The producer is advancing plans for a crude shipping operation as an alternative to pipelining oil deliveries, as third party problems on connecting pipelines continue to impede Opuama’s start-up.
Peel Hunt expects Eland to start exports via barge from OML40 licence this year.
“Implementation of this export route will enable production to restart at around 10Mbbl/d (gross), more than double the rate prior to the Forcados terminal being shut-in by militant activity in February 2016,” Peel Hunt analyst James Carmichael said.
Low operating costs and the friendly tax arrangement means that cash from sales should quickly strengthen the balance sheet and fund development of a wider portfolio.
Based on earnings forecast for the current year, Eland’s shares trade on an EV/EBITDA multiple of 0.8, falling to 0.3 next year, and a PE of 1.5, sliding to 0.5 next year.
On top of that, it trades at a 60% discount to core net asset value, based on Peel Hunt’s estimates, which is the widest discount in the broker’s coverage universe.
The broker expects the discount to diminish as the barges start to deliver the barrels.
Elsewhere in the resource sector, Peel Hunt has highlighted the appeal of platinum and chrome producer Tharisa PLC (LON:THS), which made its debut on London’s main market last June.
“Emerging from a patchy operational period into a price slump has seen Tharisa struggle for attention. The operational issues appear under control allowing stable mining output and hence plant operation,” suggested Peel Hunt’s Peter Mallin-Jones.
Chrome prices have bounced back, which means Tharisa might be on the cusp of generating the cash flows expected from the Johannesburg-listed company’s South African asset.
“Combined with the maiden dividend, we believe management has signalled a willingness to return surplus cash flows to investors, further underpinning the share’s appeal,” Mallin-Jones said.
Based on Peel Hunt’s estimates for the current year, the EV/EBITDA multiple is 1.7, which is roughly half the multiple of sector peer Lonmin.
“In our view, ongoing operational performance and cash flow delivery will likely start to unwind the multiple discount to both platinum group and copper producing peers,” the broker postulated.