The energy consultancy company had employed accounting practices that were perhaps best described as unwise, and a move to IFRS 15 standards was planned. I wanted to see the next set of full-year accounts before I could judge, but what’s been happening since has delayed that revelation.

Final results were initially expected on 21 November, but just six days before that date the firm informed us that its external auditor had asked that the company seek “additional advice from an independent accounting firm in respect of the group’s estimation methodology for expected consumption levels on live contracts.“

That rattled the markets again, and the share price headed further south. And then Wednesday we had another update.

Further confusion

Utilitywise tells us that the accounting change “will have no impact on the cash flows or underlying economic performance of the group.” And initial revenue recognition of new contracts will be reduced, but final revenue adjustments will be boosted.

That much doesn’t sound too bad, but there are some things that have shaken confidence, and the shares shed 20% by mid-morning — as I write, we’re looking at a 15% fall to 39.2p.

The company had overestimated the energy consumption across all of its contracts that matured in the two-year period between 1 August 2015 and 31 July 2017 by 18%. Apparently that’s actually an improvement over the similar period to 31 July 2016, when the figure was 19% — but in Utilitywise’s shoes, that’s not a boast that I’d be especially proud of.

There’s going to be a prior-year adjustment, and probably a “material negative impact” on the group’s equity as of July 2017. Utilitywise doesn’t yet know whether there will be a material impact on 2017 profit, but my instinct tells me not to be surprised if it turns out there is.

And talking of material impacts, there’s also likely to be one hitting revenue and accounting profit for the current year, to July 2018.

Banking problems?

The company does not yet know whether, when the final figures are unveiled, it will have retrospectively broken its banking covenants. The sole banking lender does know what’s happening and is in discussions, as we’d expect, and Utilitywise will seek waivers for any breaches and amendments relating to future covenants if needed. But it’s not something that thrills me.

After the day’s dust has settled, we’re back to the same question — are the shares worth buying now?

Well, I’m looking at what I can only see as a catalogue of incompetence here — though with changes made to the management team and astute auditors on the case, I hope we’re at a turnaround on that issue.

Anybody’s guess

Based on now-outdated forecasts, Utilitywise shares are trading on a July 2017 P/E of just 4.2. That would rise this year to only 4.4 if the predicted 3% EPS fall comes good, but it now seems likely that 2018 earnings will fall short of that.

I honestly don’t know what to expect, and I could see anything from a rapid recovery to a complete company failure — and that degree of uncertainty is enough to keep me away.

I’m still waiting for the final results, which are now due on 31 January — though the audit might still not be complete by then.

The post Is Utilitywise plc a falling knife to catch after crashing 20% today? appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any of the 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.

In reality, the shares aren’t quite as cheap as the historic P/E of 2.6 implies. Accusations that the company’s revenue recognition policy was too aggressive proved prescient. A trading update in July revealed that a change in accounting policy meant revenue would be £4m to £4.5m below previous management expectations.

It went on to explain that “given the Group’s relatively fixed cost base, substantially all of the shortfall in revenue will impact the profit before tax of the Group.” 

As a result, 2018 profit before tax will reduce roughly 40%. For some investors, this significant profit warning might come as a shock, but the warning signs were there all along for anyone keeping an eye on the balance sheet. 

The company’s accounts receivable, or revenue that has been recorded but not yet received, as of 31 July 2016 was a massive £19.7m. When the receivables figure is greater than an entire year’s worth of profit, I begin to feel uneasy.

On top of this, the company has discontinued the practice of seeking cash advances from the utilities it works with, meaning net debt could balloon by £16.4m to around £26m at year-end, unless my calculations are off. 

Utilitywise looks set to book a profit before tax of £11m if its estimates are accurate, but I’ve lost faith in its commentary and don’t consider it investible at the moment given the sudden change in expectations for both cash flows and profits this year. 

Contrarian dividends

I consider Saga (LSE: SAGA) a more attractive, yet still risky, value investment. The shares trade on a P/E of nine and offer a prospective yield of 7% to investors. Shares in the over-50s insurance and travel company tumbled roughly 30% earlier this month after revealing that underlying profit before tax is expected to grow 1% to 2%, compared to the previously expected 5%. 

The news doesn’t seem all that bad to me given the company’s strong cash flow, so I presume the market is expecting further downgrades in the near future. Perhaps the shares are currently so depressed because the insurance arm, where the business generates the majority of its profits, is performing slugglishly, or perhaps it is due to fears that conditions could deteriorate further after Brexit. 

Regardless, I believe the current valuation offers a significant margin of safety for those willing to take on a little more risk for the chunky payout. Promisingly, it seems that CEO Lance Batchelor agrees with me, having purchased over 70,000 shares since the profit warning. 

If I were to invest in the company, I’d consider a smaller  speculative position to benefit from the gigantic dividend because it is still covered 1.5 times by earnings per share. 

The post Why I’d sell this value share to buy Saga plc’s massive yield appeared first on The Twelfth Magpie.

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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.

It was trading lower by as much as 15% in early deals this morning after the company announced yet another delay in reporting its results. The company has always attracted criticism in the way it books and reports revenue, and now it seems critics could be proved correct.

Having delayed the publication of its results to 21 November, its external auditor, BDO LLP has, “requested that [it] obtains additional advice from an independent accounting firm in respect of the group’s estimation methodology for expected consumption levels on live contracts.” The publication date for Utilitywise’s annual results is now unclear. 

The firm cannot proceed with the compilation of its results until the new review is completed, which is expected in early December. 

Put simply, it looks as if investors will have to wait another few weeks to find out about the company’s financial position. 

From bad to worse

It has been a terrible year for Utilitwise’s shareholders. The company’s shares have lost 75% of their value, and investor confidence has taken a battering. 

In June the group announced that it was going to have pay back some of the commission it earned on energy contracts due to under-consumption. A profit warning then followed in July.

The latest issue stems from management’s decision to move to the IFRS 15 accounting requirement a year in advance. Under the new accounting standard, companies have to change how they book profits and revenues from multi-year contracts. Under the changes, Utilitywise’s adjusted profit before tax would have been £9.4m lower in 2016 (47% lower than the actual figure reported if the same accounting standards were applied) and £13.8m lower in 2015 (a reduction of 83%). The changes only affect the income statement. Cash flows will remain unchanged. 

Today’s news from the business implies that it is having a more complex time changing its accounting processes than initially expected. Assuming the additional scrutiny does not turn up any skeletons in the closet, the delay is not going to be a disaster for the business. Cash flow forecasts should remain unchanged, and the move to IFRS 15 is a requirement, not an option — Utilitywise would have had to make the switch sooner or later. 

Buy, sell or hold? 

With a near 30% stake in the business, Neil Woodford is Utilitywise’s largest investor, and it seems as if he still believes in the company’s outlook. 

It certainly looks as if the business can continue to produce steady dividends for investors. Last year, the group generated £12m in cash from operations and free cash flow of around £11m, which easily covered the total dividend payout of £4.2m. A similar level of dividend payouts would give a yield of 12.6% this year. 

However, the dividend estimate above assumes that nothing is hiding on the company’s books that has concerned the auditors. If that’s the case, there could be further declines ahead for the shares. 

The post Why I’d avoid catching falling knife Utilitywise plc after today’s 15% collapse appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share 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.

A bright future

Legal & General’s recent results showed that it is making strong progress with its strategy. Its post-tax profit increased by 43% in the first half of the year, with return on equity rising to over 26% from 20% in the same period of the prior year. The company has a strong balance sheet and is seeking to expand its US presence by replicating its UK business model. While it remains cautious about the prospects for the UK economy, its focus on six major growth drivers means that it has a diversified set of operations, which could positively catalyse its earnings growth over the long run.

Income potential

The company’s strong outlook from a business perspective means that the prospects of high dividend growth are substantial. The stock currently yields 5.4%, which is 1.6% higher than the yield of the FTSE 100. In 2017, dividends per share are expected to rise by 6.3%, followed by further growth of 6% in 2018. These figures are higher than the corresponding numbers for the FTSE 100, and are also likely to be above and beyond the rate of inflation. This ensures that the company’s investors should see their income returns rise in real terms over a sustained period of time.

With Legal & General having a dividend payout ratio of 65%, it seems to be balancing reinvestment for future growth and rewarding its investors. The company’s shares trade on a price-to-earnings (P/E) ratio of 11.3 at the present time and seem to be a bargain for long-term income investors.

High yield

While Legal & General’s yield is high, utility cost management consultancy business Utilitywise (LSE: UTW) has an even higher dividend yield. Based on its current year forecasts, it is expected to deliver an income return of around 9.4%. And while its payouts are not expected to be covered by profit this year, profit growth of 28% next year means the stock is due to have a dividend coverage ratio of 1.2 in 2018.

The company reported a positive trading update on Thursday. It was able to make underlying improvements to the business, such as productivity gains, despite headwinds being endured. It appears to have a solid platform for future growth, with a portfolio of energy services and strong customer service being the potential catalysts to push its profitability higher. With a P/E ratio of 10.4, it seems to be a worthwhile income stock for the long term.

The post Why Legal & General Group plc is one of the top income stocks in the Footsie appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Legal & General. 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.

Share price in reverse

Woodford participated in the IPO of AA (LSE: AA) when it was floated at 250p a share in June 2014 and bought again in a further placing at 385p in April 2015.

The shares have subsequently declined. They took another hit last Tuesday when the company fired its executive chairman Bob Mackenzie for “gross misconduct” (a Jeremy Clarkson moment with a colleague in a hotel bar) and also lowered its full-year forecast to “broadly in line with that of the last financial year.”

The shares ended the week at 206p — 18% below the price Woodford paid in the IPO and 46% below the price he paid in the 2015 placing.

(Roadside) recovery stock?

Back at the time of the IPO, Woodford described AA as a “very high-quality … utility-like” business that had been “milked” by its private equity owners. He reckoned that, having been “liberated” by the IPO, it could deliver strong growth and shareholder returns.

It hasn’t yet. Last year’s revenue and profits were below those it posted in the year it came to market. Furthermore, it’s made only modest headway in reducing its high level of net debt (£2.7bn from £3bn) and very high net debt/EBITDA ratio (6.7 from 6.9).

Nevertheless, Woodford has maintained his faith in the prospects for the business, increasing his stake on last week’s bad-news day. I agree there’s significant scope to grow the strong AA brand but I find the company’s current debt profile off-putting.

Utilitywise or unwise?

Woodford bought shares in Utilitywise (LSE: UTW) in spring 2015 when they were trading north of 300p and also participated in a placing at 290p a month later. They’re trading at 61p as I’m writing — 79% below the placing price.

The company helps businesses get better value out of energy and water contracts. A camp of bearish analysts has always been sceptical of its business model and revenue recognition policies. And they’ve been proved right.

Woodford and his team said in mid-July they were reassured by a call with management but added: “We continue to monitor the situation closely.” The company released another issue-riddled trading update last week, so it will be interesting to learn what Woodford’s position is now. My position is to watch from the sidelines for the time being.

Needle in a haystack?

Woodford has bought shares in 4D Pharma (LSE: DDDD) at prices up to 790p (in a placing in December 2015). They’re currently trading at 270p, with most of the fall having come this year.

He said last week: “Shares in 4D Pharma declined, despite continued positive progress in the development of its live biotherapeutic therapies … We remain very attracted to a long-term commercial opportunity that is being substantially overlooked by the market.”

This is one of numerous pre-revenue, lossmaking businesses Woodford has bought for their long-term potential. There could be some big winners among them but needles in haystacks come to mind. As such, I think investing in Woodford’s Patient Capital Trust (or a specialist biotech fund) is a better option than buying one or two individual stocks.

The post 3 Neil Woodford stocks trading at massive discounts appeared first on The Twelfth Magpie.

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G A Chester 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.

The consultancy that supplies multi-utility packages to businesses had seen its shares topping 350p back in early 2014, but the price has plunged as low as 36p as I write.

That includes a 40% fall today, on the back of another profit warning. 

Its business model had attracted criticism, with its policy of recording commissions from energy suppliers as income a year or even more before the cash actually arrives. 

In this case the energy firms are surely not going to renege on their commitments and not pay. But it can bring uncertainty and can lead to rising debt.

At the interim stage however, net debt stood at a relatively modest £9.6m (down from £16.8m at the same stage in 2016). That’s close to adjusted EBITDA of £9.7m, and would not alone cause me any sleepless nights.

Profit warnings

On 29 June, the firm revealed a hit to its commission levels due to anticipated “material levels of under-consumption” against a major energy contract, with the overall result likely to be a total charge in the current year of around £11.2m — £7.7m being an exceptional charge and £3.5m a reduction in underlying profit.

And now we hear that Utilitywise has lowered its revenue predictions for the full year to between £4m and £4.5m below previous expectations —  apparently down to “same supplier renewals contracts which form a substantial proportion of the revenue secured by the group in the final months of the financial year.“

The company has also now adopted IFRS 15 accounting standards, and we were told that had these rules already been in operation we wouldn’t be seeing the same drop in expected revenue. But it’s surely going to take some time to get the full picture under the new regime.

Should we buy?

The big question for investors now, of course, is should we buy? Or even sell?

The shares were already on very low P/E ratings, but after today’s price collapse we’re looking at a forward multiple of a tiny 2.2, dropping to a minuscule 1.8 based on the 19% EPS rise forecast for 2018. 

And the mooted dividends would now yield 18%.

What it will all look like once forecasts are reworked in accordance with the latest news (and based on different accounting standards) is something we can only guess at, but there would have to be something pretty catastrophic coming out of any reworking to make valuation levels like these look too expensive.

A dilemma

On the plus side, ace investor Neil Woodford owns Utilitywise shares, so he clearly saw value in its business model. I’d also say we’re looking at a classic growth story that’s gone off the rails a little, with the resulting desertion of the shares — and that could well mean an oversold bargain.

What would I do? I’d worry about whether future customers might have second thoughts having seen the series of problems this year — would they put their trust in a firm whose market capitalisation has now plunged as low as £27m?

I’d like to see full-year results (ideally with a restatement of previous results) under a more conservative accounting regime before I’d consider buying. But at the same time, if I owned the shares I don’t think I’d be selling.

The post Is Utilitywise plc a falling knife to catch after plunging 40% today? appeared first on The Twelfth Magpie.

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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Alan Oscroft 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.

However, after these declines shares in Utilitywise look exceptionally cheap and support a dividend yield that is near twice the market average. Indeed, the shares now trade at a forward P/E of 6 and support a dividend yield of 5.8%. The dividend payout is covered more than twice by earnings per share. Further, analysts have pencilled in earnings per share growth of 16% for the fiscal year ending 31 July 2017, followed by growth of 13% for the following fiscal year. The dividend payout is expected to grow by 10%, leaving the company yielding 6.3%.

So, why is the market avoiding Utilitywise? The company has taken plenty of flak in recent years over the way it books customer transactions and recognises revenue. Utilitywise tends to book sales early before it receives payment from customers, a risky strategy, especially when most of the company’s customers are small businesses. With a Brexit-inspired economic slowdown on the horizon, investors have taken fright, as small businesses are usually the first to feel the pain in a recession.

Restoring confidence

However, management is trying to restore confidence in the company. Alongside the group’s most recent set of results chief executive officer Brendan Flattery declared that the firm has decided to end the practice of taking cash advances from suppliers. A number of prior-period restatements and the non-cash impairment of Utilitywise’s investment in t-Mac were also implemented to help “improve the transparency of the balance sheet.

As yet, the City seems unconvinced, but it’s clear that management is trying to improve the group’s reputation. Utilitywise’s low valuation may discount some of the risk of investing in the firm as it attempts to rebuild and that’s why the company is on my watchlist. 

Set for a rebound? 

Bonmarché (LSE: LSE) is another company that’s fallen on hard times and after recent declines looks cheap. Over the past two years, shares in the company have lost nearly 70% and currently trades at a forward P/E of 7.6, supporting a dividend yield of 7.5%. The payout is covered 1.8 times by earnings per share.

Bonmarché’s stock collapsed during 2016 as management slashed earnings expectations. From a high of 21p, earnings per share plummeted to 10p for the year ending 1 April 2017. After this downgrade, it’s clear why the shares took a tumble. However, City analysts expect the group to return to growth of this fiscal year with earnings per share growth of 27% pencilled in and further growth of 21% expected for the following fiscal year. 

If the company can hit these targets, then the shares look exceptionally cheap on both an income and growth basis. If management fails once again, then the shares could have further to fall. But its already low valuation may help limit the downside.

The post 2 growth and income bargains on my watchlist appeared first on The Twelfth Magpie.

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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
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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.

These results look to be broadly in line with forecasts, so why have they disappointed the market?

Is Woodford right?

Utilitywise has been criticised by some investors for its business model, which sees the firm book commission payments from energy suppliers as income a year or more before it receives the related cash payment. Some investors believe this is a risky way to do business, as there’s always a chance of non-payment.

To help address this criticism and improve cash flow, it has been accepting advance cash payments from energy suppliers. However, the group announced today that in order to maintain its impartial view of the market, it will stop taking cash advances. Net debt is expected to increase as a result and cash flow will worsen, at least temporarily.

On the other hand, it’s worth remembering that the companies who pay Utilitywise’s commissions are mostly big utility firms. These businesses have strong credit ratings and are unlikely to default on their obligations. For patient investors, this firm could prove to be a long-term cash machine.

That certainly seems to be the view held by Neil Woodford, whose funds own 29.16% of it. I suspect Mr Woodford would argue that the stock’s forecast P/E of 7.1 and prospective yield of 5% provide adequate protection against the risks involved.

I have to admit I can see both sides of this argument. Mr Woodford’s support for the stock may be proved right, but for now, I’m going to look elsewhere.

Growth plans could boost profits

Sub-prime lender Provident Financial (LSE: PFG) has underperformed the FTSE 100 over the last year. The group’s shares have climbed by just 3% compared to an 18% gain for the index. Provident is the sixth largest holding in Neil Woodford’s Equity Income Fund, so this flat performance may have held back the fund’s returns last year.

The main reason for Provident’s lacklustre performance is that earnings growth has been slowing. Earnings per share growth in 2017 is expected to be just 2.5%, down from 15% in 2016. In an effort to improve this performance, the group’s management announced some new growth targets today.

The group’s Vanquis Bank credit card business has increased its target from a customer base of 1.5m-1.8m with an average balance of £1,000 to 2m-2.3m with an average balance of between £1,000 and £1,100. Provident is also targeting unsecured lending and vehicle finance growth of about £800m across its various brands.

These plans have been cautiously received by the market and Provident’s share price has risen by just 1% today. In my view, the main risk is that by expanding too much, Provident may compromise its lending standards and see higher levels of bad debt.

However, the group has a good track record and the shares look reasonably valued, with a 2017 forecast P/E of 16.5 and an expected yield of 4.7%. I’d hold at current levels.

The post Should you buy these overlooked Neil Woodford dividend stocks? appeared first on The Twelfth Magpie.

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Roland Head 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.

A simple, yet effective, approach

Last year, Mr. Woodford said: “In very simple terms, our total return expectation for a stock equals its dividend yield plus the anticipated rate of dividend growth.” 

Focusing on the strength of a growing income stream like that can lead to capital appreciation taking care of itself — if the dividend keeps going up, the share price will likely go up too, as long as the shares don’t overvalue the company.

So I’m doing all I can to make sure the firms on my watch list have strong, good quality underlying businesses, reasonable valuations and, above all, the ability to keep pushing their dividends up year after year.

Today, I’m looking at paper and packaging firm Mondi (LSE: MNDI) and utility cost management consultancy Utilitywise (LSE: UTW) to see if they make the cut for my new watch list.

Impressive dividend records

I can’t fault either firm on their dividend-raising records. Since 2010, Mondi’s dividend is up around 136% and Utilitywise has pushed up dividend payments more than 600% since 2012. Looking forward, City analysts following these firms expect Mondi’s dividend payout to rise another 5% or so during 2017 and Utiltywise’s by around 11% to July 2018.

Mondi’s business has generated decent, rising operational cash inflows that lend support to profits, and borrowings seem under control with net debt running around 1.5 times the level of operating profit. Utilitywise’s cash inflows are more patchy, but net debt is insignificant at around at 1% of operating profit.

Mondi’s operating profit margin runs around 15% and the return on capital employed at just over 19%. Meanwhile, Utilitywise has an operating profit margin close to 21.5% and a return on capital employed of 23%.

These are good figures, so it seems that both firms run good-quality, cash-generating and growing businesses.

Valuations

At a share price of 1,649p, Mondi trades on a forward price-to-earnings (P/E) ratio around 13 for 2017 with the payout covered almost 2.5 times by anticipated forward earnings. Meanwhile, at 185p, Utilitywise’s forward P/E ratio runs at just over nine for 2017 and the dividend yield around 3.8% with the payout covered 2.8 times by forward earnings.

Neither of these companies seems to be overvalued and their businesses look steady. However, both businesses have an element of cyclicality to operations and if world economies tank, I’m sure that trading, and the share prices, will go down in each case.

That said, there’s no sign of business faltering at the moment, but because of their inherent cyclicality I think both companies deserve to maintain a moderate valuation. So, I’m not expecting gains from a valuation uprating, just steady trading progress. I’m happy to include these two on my watch list and may buy some of their shares when my new funds arrive.

The post 2 top dividend growers for 2017 appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Brexit has thrown up some incredible bargains in the small-cap market. While the plunging pound has sent the FTSE 100 to yearly highs, small-cap domestic-focused equities have suffered. In some cases, the sell-off of domestic equities has been so aggressive and relentless that groups of small-caps are now trading at mid-single-digit P/Es with high-single-digit dividend yields.  

It’s not clear why investors have dumped these equities at such a rapid rate. Yes, there’s some concern about what will happen to the UK economy when the dust settles after Brexit. But a mid-single digit P/E suggests that the market believes these companies’ earnings will fall by 50% or more, which seems excessive in many cases. 

Telford Homes (LSE: TEF) and Utilitywise (LSE: UTW) are two such post-Brexit bargains. 

Housing crash?

Year-to-date shares in Telford are down by 27.3%. It appears that analysts and investors worried about the company’s exposure to the UK’s housing market, specifically in London where Telford has a significant presence. However, Telford’s management doesn’t appear to be worried about the state of the market, and when analysing the firm the figures speak for themselves. Indeed, Telford’s forward sales stand at £640m, which is 50% of the company’s expected revenues over the next three years. 

With revenues for the next three years locked up, Telford at least deserves to trade at a market average multiple, but this isn’t the case. 

Shares in the company currently trade at a forward P/E of 8.2, falling to 6.2 next year and support a dividend yield of 5.3%. The group’s net asset value per share was just under 250p at the end of March, so after recent declines, the shares are trading at a price-to-book value of 1.2. 

A defensive sector 

The utility sector is considered one of the market’s most defensive. Unfortunately, it looks as if the market believes provider Utilitywise can’t offer the same kind of defensive proposition as the rest of its industry. 

Shares in Utilitywise have lost 23% of their value year-to-date and currently trade at an extremely attractive forward P/E of 7.1 and City analysts are expecting the company to report earnings growth of 25% this year and 8% for 2017. 

That being said, Utilitywise is no stranger to controversy. The company has come under scrutiny in the past for its accounting, and some analysts are worried about the firm’s exposure to small businesses, which are likely to suffer more than most in any economic downturn. 

When it comes to the question of Utilitywise’s accounting practices, it looks as if the concerns are unfounded. One way to quickly spot if a company is inflating profits is to look at cash flows, which are harder to manipulate. For the period ending 31 July, Utilitywise reported a cash inflow from operations of £12.4m, compared to net income of £18.4m. Working capital changes accounted for the majority of the difference in the figures. Put simply; the company is generating plenty of cash and it looks as if there’s nothing to be worried about. 

The post 2 value stocks with a P/E below 8 appeared first on The Twelfth Magpie.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.