I also see great value on offer for investors checking-in to Elegant Hotels Group (LSE: EHG), the owner and operator of seven luxury hotels in Barbados.

Short-term headwinds

The Whitbread share price was comfortably above 5,000p little more than a month ago, but is currently nearer 4,500p. In its annual results, released at the end of last month, the company reported a decline in business and leisure confidence in the last quarter of its financial year ended 28 February, leading to weaker domestic hotel demand.

It further said: “This weakness has increased into March and April particularly in the regional business market, coinciding with an acute period of political and economic uncertainty in the UK.”

Compelling long-term growth story

Despite the short-term market challenges, it’s the long-term growth story for the Premier Inn business that I find compelling. There’s still plenty of expansion to come in the UK, and the company is accelerating its plans to replicate the domestic, multi-decade success story in Germany. This has been helped by the £3.9bn sale of its Costa Coffee business to The Coca-Cola Company earlier this year.

The main reason I’d be happy to buy Whitbread’s shares today (on 19 times forward earnings with a 2.1% dividend yield) is the prospect of strong, multi-decade earnings and dividend growth. However, there are also possibilities of more immediate returns. City analysts reckon Whitbread’s current valuation makes it attractive for a takeover bid, while activist investor Elliott Advisors is reportedly agitating for the company to unlock value from its £5.8bn property portfolio.

Eye-catchingly cheap

Over in Barbados, Elegant Hotels reported a solid performance in its half-year results today — despite a competitive market — with a 5% increase in underlying profit before tax on 3% higher revenue. Management said it has good visibility of bookings for the remainder of the year, and is comfortable with current market expectations.

The stock trades at an eye-catchingly cheap 7.5 times forward earnings at a share price of 71.5p (up 3.6% on the back of today’s results). A prospective 4.7% dividend yield also spells value, as does the company’s freehold-property-backed implied net asset value of 156p a share.

Well-backed business

Despite it being a smaller company — its market capitalisation is £63.5m — I find it hard to understand why the stock is trading at such a cheap valuation.

Renowned entrepreneur Luke Johnson is a non-executive director and 12.5% shareholder (albeit his Midas-touch reputation has been somewhat tarnished by the recent collapse of Patisserie Valerie’s parent company). And Elegant’s shareholder register is also packed with blue-chip institutional names, including the asset management arms of Schroders and Close Brothers.

Looking to the future

The company plans to expand in a measured manner, both on Barbados and further into the Caribbean, whilst ensuring its balance sheet remains robust. With its cheap valuation, nice dividend, and growth prospects, I rate the stock a ‘buy’. Indeed, I think it has potential to be a long-term big winner for investors today.

The post This FTSE 100 market leader isn’t the only stock I’d buy today appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Schroders (Non-Voting). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I would be happy to buy HSBC for its dividend income. But I wouldn’t expect big gains from a bank that’s already valued at £133bn and trades at a small premium to its book value.

Another concern is that although banks’ balance sheets appear to be much stronger than they were before the financial crisis, the market remains unconvinced. Banking stocks have headed steadily lower this year, despite rising profits. I think there’s a risk that total shareholder returns from this sector could lag the wider market for some time yet.

For this reason, I’m starting to focus my attention on finding opportunities among small-cap stocks, which may have the potential to deliver much bigger gains.

Profit from play

One stock I hope to add to my own portfolio in the next few weeks is toy manufacturer Character Group (LSE: CCT). This company specialises in producing toys based on television, film and game franchises such as Peppa Pig, Dr Who, Pokémon and Minecraft.

The business was hit by the failure of Toys R Us, but things now seen to be getting back on track. According to the firm, trading during the second half of the year to 31 August showed “a return to its previous growth pattern”. Management is confident that profits for the year will “comfortably reach market expectations”.

We can see what these are by checking broker consensus forecasts, which show adjusted earnings of 39p per share this year, with an expected dividend of 21p. These numbers put the stock on a forecast P/E of 12.9 with a prospective yield of 4.2%.

That looks like a good entry point to me for this company, which generated a stunning return on capital employed of 50% last year. I rate these shares as a buy.

A deep value bargain?

My final stock is Barbados-based luxury resort operator Elegant Hotels Group (LSE: EHG). Shares in this firm have fallen by about 25% so far this year. The decline seems to have been triggered by news of a 23% fall in adjusted pre-tax profit for 2017, followed by a dividend cut.

However, the shares are up by 5% at the time of writing following a positive trading update. The company says that bookings for next year are currently “ahead of the same period last year”.

Management also notes that recent tourist taxes implemented on flights and hotel stays in Barbados have not yet had a material impact on profits.

At the last-seen price of about 69p, Elegant shares offer a forecast dividend yield of 4.6% and trade at a discount of about 30% to their tangible net asset value of c.100p per share.

Analysts expect the group’s earnings to rise by 7% to 8.7p per share next year, putting the stock on a modest P/E of 7.5. It’s also worth noting that the company received an (unsuccessful) takeover approach in December 2017.

In my view, Elegant looks attractive as an income buy and a potential bid target. I’ve added the shares to my watch list for further research.

The post Forget the HSBC share price, these small-cap dividend stocks could be real bargains appeared first on The Twelfth Magpie.

More reading

• Up 250%! Here’s why I bought HSBC shares over SpaceX stock
• How much might £19,999 in a Stocks & Shares ISA be worth by 2036?
• Could a Stocks and Shares ISA eventually replace the State Pension?
• 2 bank shares I like better than Lloyds today
• How much do I need to invest in HSBC shares to target £5,986 a year in second income?

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As it turns out, revenue for the year declined from $60.1m to $57m, and the revenue per available room decreased by 6.7%. Occupancy fell by 5.5% to 62.9%. Nonetheless, despite sluggish demand, the company has continued with its expansion plan and announced today that it had completed the $11m acquisition of Treasure Beach Hotel in Barbados.

Still, it looks as if things are looking up for the firm. In a trading update issued at the end of February, Elegant informed investors that trading during the first two months of the year was in line with management expectations. While the announcement did not detail management’s expectations for the year, the key takeaway from this trading update is that at least performance has not deteriorated further.

Thanks to acquisitions, City analysts expect the company to report a high single-digit increase in revenue for the financial year ending 30 September. However, pre-tax profit is expected to decline to £9m, from last year’s reported figure of £12.2m. Last year the company’s earnings benefited from a one-off property investment gain. For the 2017 financial year, City analysts have pencilled-in earnings per share of 7.9p, down 22% year-on-year. After 2017, analysts believe Elegant’s outlook is set to improve dramatically. For the following fiscal year earnings per share could increase by as much as 18% as revenue ticks higher by 9%.

Undervalued opportunity?

It seems the market does not believe that the company can hit City targets for growth. At the time of writing, shares in Elegant are trading at a forward P/E of 10.8, which is around half of the multiple of 22 times forward earnings awarded to larger sector peer Intercontinental Hotels Group. This valuation seems unwarranted, especially considering Elegant’s growth potential and strong balance sheet. 

For the year ending 30 September 2017, the company reported loans and borrowings of approximately $46m compared to a cash balance of $6m and property worth $145m. As well as a strong balance sheet, the company is also highly cash generative, generating $17m of cash from operations during the last financial year. Of this total, $9.5m was returned to shareholders via dividends and at the time of writing shares in Elegant currently support a dividend yield of 7.1%.

The bottom line

So overall, even though the past year has been full of uncertainty for Elegant, it looks as if the company is set for steady growth. However, despite the company’s growth potential, cash generation, strong balance sheet and dividend yield, the shares still trade at a deep discount to sector peers. With this being the case, I believe Elegant looks to be a highly attractive undervalued growth stock.

The post This small-cap growth stock could be undervalued by as much as 100% appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.