This cheap UK share looks oversold to me

It’s no surprise that Bakkavor’s (LSE: BAKK) share price has plunged in recent months. The UK’s largest supplier of ready meals and food-to-go had been on a steady path pre Covid-19, maintaining its underlying profitability and successfully protecting its EBITDA margins despite difficult market conditions – notably low consumer confidence and labour inflation. Importantly, prior to Covid-19, IGD had predicted that the food-to-go market would grow by more than 26% in value between 2019 and 2024 in the UK due to changing consumer patterns that will still exist post lockdown.

Bakkavor, which has also expanded into the US and Chinese markets, was forced to temporarily close two factories and put all non-essential capital investment and discretionary expenditure on hold. However, it has been able to operate with significant headroom during this extremely turbulent time. What’s more, it hasn’t had to turn to government funding.

So why do I think Bakkavor is a cheap UK share?

The FTSE 250 company’s fortunes are looking up as the lockdown restrictions are eased across the globe. In Bakkavor’s own words, “sales volumes in all three regions have stabilised and are showing early signs of recovery”.

Bakkavor’s UK like-for-like sales, which were down 19% in April, were only down 13% in May and like-for-like sales for the five months ending in May were only down 5% against last year’s. This is promising given the company generates 88% of its revenue on home turf. In addition, a further recovery is anticipated as footfall will increase in the coming weeks as high streets reopen. This ought to create a greater demand for food-to-go items.

Looking abroad to China and the USA, a recovery is commencing. This international segment of the company had just started to benefit from recent capital investments. It had experienced a healthy 16% revenue growth in the 2019 financial year against a modest like-for-like 0.2% in the UK.

Despite Chinese operations being severely impacted towards the end of January through the beginning of April, sales volumes have stabilised since. This is thanks to restrictions on movement being lifted, while the majority of restaurants and stores are now open.

With the western world being a couple months behind, Bakkavor has focused its efforts in the USA on reducing capacity to adapt to the lower demand. As a result of it doing this quickly and efficiently, it has been able to limit the financial impact. With the US releasing lockdown, Bakkavor will be expecting an increase in demand, which is why I view it as a cheap UK share right now!

Worth investing in?

Bakkavor’s shares are currently trading at 80p, exactly half the 12-month high of £1.60. The shares have a historic adjusted P/E ratio of just 6.2x and a historic yield of 5%. Although the company is suspending dividends at present, this does indicate the prospective yield potential once the business recovers from Covid-19.

In the long term, this cheap UK share still has a very bright future. I believe it’s worth investing in while it is still at that 50% discount!