Investing in UK shares is a bit like buying wine from Aldi – people seem to be suspicious, but there’s genuinely good value on offer. But in fairness, it can be hard to tell whether something just looks cheap or is actually a bargain.
One guide to what a stock is actually worth is the company’s book value – the difference between its assets and its liabilities. And a lot of UK shares look cheap on this basis.
Young & Co’s Brewery
Young & Co’s Brewery (LSE:YNGA) doesn’t actually operate any breweries – it runs a chain of pubs and hotels. And the stock trades at a price-to-book (P/B) multiple of 0.6.
That means investing is a bit like buying £1 coins for 60p. But for investors to get that £1 in cash, the firm would need to liquidate its assets, which it’s currently showing no signs of doing.
It’s therefore probably more accurate to say investing in Young’s shares is like buying £1 coins in a locked money box for 60p. But I think there are other reasons to like the business and the stock.
The firm owns its pubs outright instead of leasing them, which protects it from rising rents. And its focus on the premium end of the market means it has much higher margins than JD Wetherspoon.
While high margins are a good thing, premium pricing is risky. Young’s plans to pass on the effects of higher staffing costs from the Budget by increasing prices, but these are already relatively high.
I think there’s a real danger this could put customers off. So while I like the business and I’m considering buying the stock, I’m certainly not dismissing this risk.
Dowlais
Right now, shares in Dowlais (LSE:DWL) are trading at a P/B multiple of 0.4. And unlike Young’s, the company is trying to realise this discount by selling off its assets.
Specifically, the firm is trying to divest its Powder Metallurgy business. This is valued on its balance sheet at £884m, which is a lot in the context of an organisation with a £911m market cap.
That makes it seem like investors could get all of their money back by selling part of the company, but it’s not quite as straightforward as this. Dowlais has a lot of debt that also needs factoring in.
Even accounting for this, though, I think the stock is clearly undervalued. And the remaining business – which manufactures parts for cars – looks like it’s in a strong position.
It has agreements with 90% of the leading car companies and is especially well-positioned to benefit from the shift to electric vehicles. I think this is inevitably, which is very positive for Dowlais.
Investors shouldn’t ignore the debt on the firm’s balance sheet as an ongoing source of risk. But I think the potential sale of the Powder Metallurgy business makes this a stock to consider buying.
Bargain prices?
A lot of UK shares trade below the book value of the underlying businesses, but not all of them are bargains. Stocks that look cheap can turn out to be value traps.
I think Young’s is a quality business and Dowlais has a clear plan to generate value for shareholders. That’s why the discount to book value is something investors should take seriously in both cases.
This post was originally published on Motley Fool
