In today’s article I’ll ask whether three of this year’s biggest fallers are now cheap enough to qualify as true bargain buys.
Vedanta Resources
Shares in Vedanta Resources (LSE: VED) have fallen by 50% over the last 12 months. Like its larger peers, the big Indian miner is feeling the effects of low commodity prices and is expected to report a small loss this year. The interim dividend was cancelled and the final payout placed under review.
However, the forecast loss of $236m is pretty small when compared to expected revenue of $11.8bn.
In my view, the real story is about Vedanta’s high debt levels and its strong free cash flow. During the first half of this year, the group generated free cash flow of $1.3bn. Much of this was used to reduce Vedanta’s net debt by $0.9bn to $7.5bn.
Vedanta’s market cap is now only 1.3 times its free cash flow from the last twelve months. That’s extremely cheap. What’s less clear is whether the firm will be able to continue to generate cash and reduce its debt levels.
If it can, then Vedanta could prove to be a very profitable long-term buy, in my view.
UK Mail Group
Market wisdom says that profit warnings come in threes. UK Mail Group (LSE: UKM) delivered its second profit warning this year today, alongside a dismal set of interim results.
Pre-tax profit before exceptional costs was 56% lower than for the same period last year. The interim dividend has been cut by 25% to 5.5p. If the final dividend is also cut by the same amount, then the total dividend for this year will be 16.4p, giving a prospective yield of 5.0%.
However, I wouldn’t be too sure of this. The firm’s message today was that problems with its new automated hub are taking much longer than expected to sort out. Next year’s profits are now likely to be lower than previously expected. I suspect the ongoing problems could limit the firm’s performance and its ability to accept extra parcel volumes over the key Christmas period.
On this basis the 10%+ fall in the share price so far today looks justified. My calculations suggest that even after today’s falls, the shares are probably trading on around 15 times next year’s earnings. I think it’s too early to buy.
Monitise
Former market darling Monitise (LSE: MONI) has now fallen by 89% in 2015. The company now belongs to a small group of stocks which trade below their net cash value.
Does this mean — finally — that Monitise is a buy?
There are some encouraging signs. Broker forecasts for the current year suggest that the firm will report a loss of £14.3m this year. That’s a big improvement on three months ago, when a loss of £29.7m was expected.
However, it might be wise to be cautious. Monitise has repeatedly disappointed the market and failed to breakeven. The firm’s £78m net cash balance will continue to fall and the loss of experienced chief executive Elizabeth Buse is a big disappointment.
Monitise obviously offers a service that people will pay to use. But is it the right product at the right time? I’m not sure. In my view, the chances of this stock being a profitable investment are very uncertain.