One way investors can reduce risk is by buying assets trading at a discount to their intrinsic value. Several metrics can be used to determine the value of a business, including the price/earnings (p/e) and price-to-book value (p/b) ratios. Two others are Ebitda (earnings before interest, tax and amortisation) and Enterprise Value-to-Ebitda. The process can be more complex if a company has several operating divisions, which may have different attributes and prospects. The sum of private market valuations – the value that a trade or private-equity buyer would pay to acquire control – for each division may be higher than the valuation of the whole company, producing a discount to a “sum of the parts” valuation.
These discounts can narrow for several reasons. The stockmarket, driven by news or a shift in sentiment, can change its view of the valuation of the company; boards can unlock shareholder value by disposing of one or more divisions; or an investor identifies the opportunity and bids for the company. Below are three examples of smaller British firms that we believe are trading at notable discounts to their potential sum-of-the parts valuations.
A pharma group ripe for partition
Clinigen (Aim: CLIN), a pharmaceutical services and products group, has three divisions, built up through mergers and acquisitions (M&A) since its initial public offering in 2014. The shares trade at a forward p/e multiple of ten compared with a five-year average of 16. While there is some logic in keeping its three divisions together, each would appeal to different trade buyers. In our view, the current valuation is sufficiently attractive to interest a financial bidder, who could either integrate the divisions further or undertake a controlled break-up over time.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Cash-rich chemicals
Elementis (LSE: ELM) is a speciality chemicals firm with three “core” divisions and several smaller business units. There is some customer overlap among the core businesses. The current rating of ten times forward earnings is depressed owing to the impact of Covid-19 on its sales and relatively high borrowings. But these will fall over time as the company is very cash-generative. Disposal of one of the smaller, non-core business units would accelerate debt reduction, simplify the story and support a share-price rerating.
Making money in a media niche
Euromoney Institutional Investor (LSE: ERM) is a niche media firm providing companies with financial information. It consists of three divisions. The jewel in its crown is its pricing division, which is based on a subscription model and has grown well over recent years. M&A multiples for similar assets imply that one of the other two divisions is being completely overlooked by the market. Euromoney postponed plans to sell the asset management division earlier this year, but we suspect it will revisit this decision.
Private equity has acquired similar business-media companies over the last couple of decades. The forward p/e is just over 14, assuming some recovery from the trough. We believe that Euromoney’s profit recovery will continue for several years and the stock could again trade at its peak of £15 within four years, implying ample upside from here. The company has no debt and the capacity to pay a good dividend.
-
The MoneyWeek Readers' Choice Awards 2025MoneyWeek Awards The MoneyWeek Readers' Choice Awards celebrate the products and services that help you make, keep and spend your money. Find out more about this year's awards.
-
8 of the best houses for sale with home cinemasHouses for sale with home cinemas – from a modern oast-house style property in Kent to a house in Buckinghamshire with Dolby sound and bespoke seating
-
Large cap stocks start to struggle – is it time for investors to reassess their focus?Buying quality large caps worked very well last decade. A more volatile world will be a bigger challenge for these star stocks, says Cris Sholto Heaton
-
How to generate income with fixed-interest investmentsPublic debt is overvalued, but other fixed-interest investments now look like a bargain, says Max King
-
Three top-notch Taiwanese companies cashing in on the advent of AIOpinion Eric Chan, investment director and co-manager of the Aberdeen Asian Income Fund, highlights three potential Taiwanese winners in the technology industry
-
Weight-loss drugs could revolutionise the economy – the investments to buy nowThe new generation of weight-loss drugs are a boon for the overweight, but they also promise to change our relationship with food and revolutionise the economy
-
Find tomorrow’s Asian giants while they are still smaller companiesOpinion Nitin Bajaj, portfolio manager of the Fidelity Asian Values trust, picks three Asian companies to invest in.
-
AI will maintain Moody’s market lead, says Stephen ConnollyOpinion Veteran data provider Moody's has adapted well to the modern world, and is one of Warren Buffett’s longest-held investments
-
Is BlackRock World Mining gearing for a recovery?Opinion After a frustrating year, BlackRock World Mining is positioned for growth and to capitalise on the sector's recovery
-
Should you limit exposure to US tech stocks?An end to the AI boom would shake both US funds and global trackers. Here’s one way to trim exposure to US tech stocks
