Insolvency rates begin to boom

I think insolvency practitioner Begbies Traynor Group (LSE: BEG) could see profits soar as the Omicron variant and soaring inflation hit the economy. Insolvency rates have been creeping higher again in the UK as conditions have become tougher for businesses.

New Insolvency Service data last week showed 1,674 corporate insolvencies in November in England and Wales. This was up markedly from 1,405 in October and is the highest level since the pandemic began.

Begbies Traynor’s trading update last week showed revenues up 40% between May and October. This gives it terrific momentum going into the new year. I’d buy the company despite the possibility that fresh furlough support for businesses could be coming down the line, suppressing insolvency rates as they did earlier in the pandemic. Begbies Traynor trades at 135p a share.

A perilous property stock

Town Centre Securities (LSE: TOWN) trades at the same price, more or less, as Begbies Traynor. But it’s a property stock I wouldn’t touch with a bargepole. True, its asset portfolio is highly diversified by sector. However, it still has considerable exposure to retail properties, commercial assets and car parks. These are all sectors which are in colossal danger as Covid-19 infection rates soar and the prospect of fresh lockdown restrictions hovers.

On the plus side, Town Centre Securities also owns a number of residential properties across the country. This gives it an opportunity to make big profits as Britain’s chronic homes shortage pushes property prices steadily higher. Still, I don’t believe this quality offsets the risks I mention above. Rents collection fell to 82% during the six months to October 2020 when the pandemic first began.

Looking good

Rail fare news last week poses a threat to Town Centre Securities too. Ticket prices are set to leap 3.8% from January, it was announced. This will be the biggest rise since 2013. The high cost of commuting is hastening the adoption of flexible and home-based working, posing a big threat to the future of the office.

Lookers (LSE: LOOK), however, may well have greeted the news with a wide grin. The rising cost of public transport plays into the hands of car retailers like this. I believe ticket prices could keep soaring too as broader inflation rises (travel costs are directly linked to the level of retail price inflation).

I also think Lookers could thrive in the short-term and beyond as growing fears over the environment turbocharge demand for electric vehicles. Latest Society of Motor Manufacturers and Traders data showed sales of battery-powered and hybrid vehicles soar 67.4% year-on-year in November. I think the car retailer (which trades at 63p per share) is a top buy despite the threat that new car shortages could persist.

Of course, returns are never guaranteed with any investment approach. Still, I believe that buying stocks at low valuations is an approach that has helped my portfolio over the past decade.

And with that in mind, here are two super-cheap UK shares I’d add to my portfolio today. 

Super-cheap UK shares

When looking for cheap shares, investors often overlook growth companies. I think this is a big mistake. Stocks that look cheap compared to their prospective growth can be just as good investments as those that look cheap on other metrics. 

That’s why I’d buy Vitec (LSE: VTC) for my portfolio. At first glance, this stock doesn’t look cheap. It’s trading at a price-to-earnings (P/E)  ratio of 21.8. However, with earnings per share expected to rise substantially in 2021 and 2022, the stock is trading at a 2022 P/E of just 17. 

Vitec provides hardware products and software solutions to the rapidly expanding content creation market. The global digital market is expected to grow at a compound annual rate of 9.1% by 2025.

If Vitec’s growth continues at this rate, the stock could currently be selling at a low-teens multiple of 2025 earnings. That looks cheap to me compared to the valuations of stocks in the same sector around the world. These stocks are trading at multiples around 25 times forward earnings. 

This potential is why I believe this is one of the best cheap UK shares to buy now. That said, the company isn’t guaranteed to hit these growth targets. If growth stumbles, investors may decide to avoid the stock and push its valuation lower. That’s the most significant risk of investing in Vitec today. 

Still, I’d buy the stock today based on its growth potential. 

Deep value 

The other company I’d buy for my portfolio of cheap UK shares is Town Centre Securities (LSE: TOWN). In fact, I already own shares in the business. 

I should start by saying this isn’t an investment for the faint-hearted. The real estate investment trust owns a portfolio of commercial property assets in Leeds and Manchester. Unfortunately, these have seen their valuations and income decline over the past 14 months.

It’s also a relatively small business with a market capitalisation of just £72m, at the time of writing. 

Aside from these risks, the stock is selling at a price to book ratio of 0.5. I think that looks incredibly attractive. Moreover, its largest shareholders are also the founding family, which means they’re incentivised to achieve a good outcome for all investors. 

Based on these reasons, I’d buy more of the stock for my portfolio of cheap UK shares, despite the risks outlined above. Of course, the company may encounter further turbulence as the economy recovers from the pandemic, but I’m encouraged by its low valuation and management ownership. 

This doesn’t come as a shock. Current prices of £23.90 per share mean that Clarkson carries a forward price-to-earnings (P/E) multiple north of around 23 times. It’s a reading that fails to reflect the storm facing the global shipping industry.

Analysts have been tipping a sharp fall in seaborne volumes as the global economy grinds to a halt. Some recent truly-chilling export data backs up their pessimistic take. Chinese PMI data last week showed new export orders came in at 35.3 in May, not much better than April’s reading. It continues to crash at a frightening rate — any reading below 50 shows a contraction.

The fast-developing worldwide recession suggests export levels will remain in the mire. Data also suggests shipments from other important export economies like the US and Germany will keep struggling too. It’s not just the Covid-19 hangover that threatens to damage global shipping levels. Re-emerging tensions between the US and China also cast a shadow over trade flows. Clarkson just carries too much risk to be considered a sensible investment right now.

Sales panic

The earthquake facing the retail sector encourages me to think that Town Centre Securities (LSE: TOWN) is a risk too far as well. Over the short-to-medium term, the retail property owner will battle the impact of a shocking economic downturn on consumer spending.

It faces three significant long-term beartraps too. First, the unstoppable rise of e-commerce that’s pulling shoppers out of retail parks and shopping malls in their droves. Then there’s the rising importance of sustainability for consumers that’s causing them to scale back the amount they buy.

And finally, the fear factor caused by the Covid-19 breakout, with shoppers likely to abandon the number of trips they take over concerns over future pandemics. Studies have shown people are much more concerned over trying and testing products in-store before making their purchase, a phenomenon that’ll feed into the growth of internet retailing.

Crashing out

Town Centre Securities is already in quite a fix. Forget for one second its failure to collect a quarter of rents since the coronavirus emerged, a reflection of the recent quarantine and the mass shuttering of the retail sector. The small-cap’s been paddling against the tide for some time now, which is why its share price has crashed around 60% during the past five years.

Its shares look relatively cheap on paper following the stock market crash. At current prices of 106p per share leaves it carrying an undemanding forward P/E ratio of 14 times. But I don’t care about this. Its rapidly-worsening trading outlook makes it far too risky for my liking, so I’d rather invest my money elsewhere.

The impact of the coronavirus breakout threatens to damage revenues at Workspace over a much longer timeline. Why? Well the need for millions of workers to clock in and operate from home has likely quickened the rate at which the home working revolution will being adopted.

Companies the world over are already putting systems in place that will enable their employees to perform remotely in case of another crisis like the one Covid-19 has created. It’s a development that has made shared work spaces and centralised offices that bit more redundant. I don’t think that a slightly-elevated forward price-to-earnings (P/E) ratio of above 20 times reflects Workspace’s muddy earnings outlook, in both the near term and beyond.

Stay out of Town

Town Centre Securities (LSE: TOWN) is another property owner that stands to lose from a likely surge in remote working in the wake of the coronavirus. The prospect of subdued demand for its office space is only one part of the problem for this small-cap though.

Retail assets and car parks form significant parts of Town Centre Securities’ bricks and mortar portfolio too. They are properties which have suffered a significant drop in footfall during the ongoing lockdown. And they are assets whose long-term outlooks have taken a whack because of the mass adoption of e-commerce by housebound Britons.

Most recent data from the British Retail Consortium shows that online sales in March rocketed 18.8% on an annual basis. The internet has long cast a shadow over the likes of Town Centre Securities. But the Covid-19 tragedy has exacerbated its troubles as new users flock to do their shopping online.

I don’t care about this stock’s low forward P/E ratio of around 11.5 times. It’s a share whose long-term profits outlook is becoming increasingly scary.

Another Covid-19 crisis

Fossil fuel producers like Royal Dutch Shell (LSE: RDSB) also stand to suffer in the post-coronavirus landscape. It’s not just a near-term demand crash that they need to fear either. It’s a renewed drive to cut greenhouse gasses in the wake of the pandemic.

Experts have noted that some of the areas most affected by Covid-19 happen to be some of the most polluted, like Wuhan in China and Lombardy in Italy. It’s a connection that scientists made during the SARS outbreak at the beginning of the century too. And it’s a theme that could see global governments become even more determined in their drive to cut carbon footprints.

Shell’s forward P/E ratio of 23 times is sky high considering its growing profits problems, though its reduced 3.6% dividend yield takes the edge off a bit. Still, it’s not a share I’ll be touching with a bargepole. I’d much rather invest my money elsewhere.

Iron ore prices have dropped in recent months amid signs of worsening economic conditions in China, and if official projections are anything to go by, we could see the demand for the steelmaking ingredient retrace sharply in 2020.

According to the China Metallurgical Industry Planning and Research Institute, the country’s steel output will fall to 981m tonnes next year from a projected 988m tonnes in 2019, prompted by an expected 0.6% fall in steel off-take to 881m tonnes. Demand from shipbuilding is expected to plummet 11.5% year-on-year, whilst drops are also predicted from the critical auto and construction industries (by 3.6% and 0.6% respectively).

No wonder, then, that City analysts are expecting Rio Tinto’s earnings to sink 13% in 2020. And given that key economic indicators across the globe are continuing to worsen, and supplies from key iron ore producers like Vale, BHP Group and Rio Tinto itself are at the same time heading northwards, it’s possible that another painful reversal will be reported in 2021. For these reasons, I’m ignoring the Footsie firm despite its low P/E ratio of 10.3 times for next year and sky high 6.1% dividend yield.

Stay out of Town

Town Centre Securities (LSE: TOWN) is another big yielder I think market-makers should desperately avoid on Friday the 13th.

The share price has taken a heck of a whack in recent weeks following M&G’s decision to suspend its Property Portfolio fund, a consequence of high redemptions as investors panicked over the health of the retail property market. However, Town Centre Securities still trades on a slightly-toppy forward P/E multiple of 18 times, and given just how dire retail conditions remain in the UK, this leaves plenty of scope for more weakness in the weeks ahead.

This FTSE 250 firm saw EPRA profit drop 8% in the 12 months to June, a reflection of rising numbers of retailers filing for CVAs. And data shows that the number of shops encountering severe financial distress has worsened since then too, causing me to worry what Town Centre Securities’ next set of trading numbers will look like when the  half-year report is unpacked in February.

City brokers currently expect earnings to edge 1% lower in the full year to June 2020, though I fear that some significant downgrades could be around the corner given the slump that the high street finds itself in. Latest British Retail Consortium data showed total retail sales in the UK dropped 4.4% between October 27 and November 23.

This makes me fear that broker projections of another 11.75p per share full-year dividend, and consequently a 5.4% yield, are in jeopardy too, given that earnings per share in fiscal 2020 are expected to come in at around the same level. I think Town Centre Securities should be avoided like the plague as there are plenty of other superior income bets to buy today.

The financial giant is riding on the back of the booming Georgian economy and third-quarter results released this month showed net profits surge 18% year-on-year to 126.8 Georgian Lari, while its loan book increasing more than 21% in the period.

In 2020, City analysts expect TBC Bank to record a 12% earnings increase, one which leads to predictions of more meaty dividend growth too and therefore a 6.6% dividend yield.

Although TBC’s share price has dropped 20% in value since the turn of January, I think market makers are missing a trick here. Indeed, with the business trading on a forward P/E ratio of just 4.6 times, I reckon now is a great time for long-term investors to buy shares in the business.

The property play

I certainly wouldn’t encourage share pickers to go dip buying over at Town Centre Securities (LSE: TOWN) though. The property investment play has seen its share price erode 11% since the start of 2019 as retail conditions in the UK have steadily worsened. Recent data also shows there’s still plenty to be worried about as we enter the new year.

Figures this week from the Centre for Retail Research showed just how crumpled consumer spending activity, high business rates and the e-commerce  phenomenon are hammering bricks-and-mortar retailers.

This showed high street chains (with 10 or more stores) had closed a whopping 5,834 of their premises so far in 2019, up an eye-popping 77% on the whole of last year.

Bad to worse?

Town Centre Securities has been reducing the number of retail assets on its books but it still has exposure of around 50% to the Retail and Leisure sectors. And naturally, this is still playing havoc with the AIM company’s bottom line — pre-tax profits (on an EPRA basis) fell 8% in the fiscal year to June, to £6.4m, due to fresh numbers of traders either entering administration or filing company voluntary arrangements.

I’m pretty fearful over what Town Centre Securities’s half-year report will throw up in February given that key retail gauges for the large part have worsened considerably since the summer.

Right now the business trades on a forward P/E ratio of 18 times, a reading I feel fails to reflect the high chance of City brokers slashing their earnings forecasts in the lead up to the results and in the aftermath (the current 1% drop forecast for fiscal 2020 certainly looks more than a tad optimistic, in my opinion).

Given the strong possibility of another share price hammering in 2020 then, not even Town Securities’s forward dividend yield of 5.5% — one which smashes the UK mid-cap average of 3.3% to splinters — is enough to tempt me to buy.

Unlike TBC Bank, I reckon this is a share which all ISA investors should avoid like the plague.

Each firm offers a yield of at least 5%, so patient shareholders should be rewarded with a generous income.

The boss is back

Shares in fashion brand Superdry (LSE: SDRY) have fallen by about 75% since January 2018.

Are there problems at Superdry? Yes. Is the business going to fail? I don’t think so.

Founder Julian Dunkerton is back in the driving seat and determined to return this brand to growth.

In a trading update last week, Mr Dunkerton warned that profits would be lower than expected for the year ended 28 April. But since taking charge on 2 April, he’s already made a number of changes that are expected to boost sales and improve profits margins.

Flagship stores are being restocked with a greater choice of items. Discounts and sales are being scaled back. And the range of choices available on the website has been expanded. These changes are expected to generate more full-price sales, boosting profits and helping to rejuvenate the brand.

There’s still a lot to do. But with the shares trading on 9 times forecast profits and offering a 5.5% dividend yield, I think the shares rate as a value buy at current levels.

Keeping it in the family

Leeds-based property firm Town Centre Securities (LSE: TOWN) owns a mix of retail, leisure and office property. It’s also the owner of the CitiPark car park business, which owns multi-storey car parks in a number of major towns and cities.

Town Centre’s shares have fallen by about 25% over the last year, and now trade at 40% discount to their net asset value of 361p per share. To some extent, I think this caution is justified.

But although some retail tenants have gone into administration, others are looking for new shops. Management has already found new tenants for six of the eight units that became vacant last year, with higher average rents than before.

The founding Ziff family still controls about 60% of Town’s shares. They’ve supported and grown the business since its foundation in 1959. Town Centre Securities survived the financial crisis without needing refinancing and I don’t see any reason why this impressive track record can’t continue. With the shares trading at a 40% discount to book value and offering a yield of 5.5%, I think now could be a good time to buy.

A growth business

A key growth area for retail landlords is leisure businesses such as 10-pin bowling operator Ten Entertainment Group (LSE: TEG). This business has impressed me since its flotation in 2017.

Adjusted pre-tax profit rose by 4% to £13.5m last year, while the dividend climbed 10% to 11p per share. Analysts expect earnings to rise by 25% to 20.9p per share this year, thanks to a mix of new openings and refurbishments.

The business carries very little debt and reported an impressive 15% operating profit margin for 2018. However, the shares pulled back during the second half of last year, perhaps due to concerns that Brexit could hit consumer spending.

I suspect this risk may be overstated. Trading on 11 times 2019 forecast earnings and offering a dividend yield of 5.4%, I think Ten Entertainment could be a good long-term growth buy for UK-focused investors.

The problem is that owning and renting your own properties leaves you exposed to unpredictable repair costs, problem tenants, void periods and a tidal wave of paperwork. That’s why I prefer to generate an income from bricks and mortar by investing in good quality property stocks.

One company that’s on my radar is Leeds-based commercial property firm Town Centre Securities (LSE: TOWN), which published its full-year results today. This family-owned business has held or increased its dividend every year since its flotation in 1960. That’s 58 years without a dividend cut.

A long-term buy?

A mix of retail, leisure, office and car park properties helped to increase the group’s EPRA net asset value by 6.8% to 384p per share last year. With the share price at a last-seen level of 260p, the stock now trades at a 32% discount to its net asset value.

Although adjusted earnings fell by 2% to 13p per share last year, the dividend rose by 2% to 11.75p, giving the stock a 4.5% yield at current levels.

Conservative management helped this company to make it through the financial crisis without needing to cut the dividend or raise fresh equity. Over the last two years, the family-led board of directors has maintained this approach by cutting the firm’s exposure to the troubled retail sector from 70% to 55%.

I’m confident in the firm’s long-term prospects. But it has to be said that overall returns are average, rather than outstanding. The business delivered a total property return of 9.4% last year, broadly level with the 9.3% return from the benchmark MSCI (IPD) All Property index.

This stock has also traded at a discount to book value more often than not in recent years. So I don’t see this as a buy signal in itself.

However, Town’s falling share price is widening the valuation discount and pushing up the dividend yield. I’m starting to get interested, and have added the stock to my watch list.

A FTSE 100 landlord with a 5% yield

If you’d prefer to invest in a larger business with a more diverse range of assets, one potential choice is FTSE 100 firm British Land Company (LSE: BLND).

This firm’s portfolio contains a mix of prime London office property and major shopping sites such as Broadgate in London and Meadowhall in Sheffield.

It’s clear that this business is heavily exposed to the retail market. However, the group’s focus on so-called tier 1 sites and its ownership of top-quality London office property should help reduce the risks.

Another attraction is that the group’s debt levels and borrowing costs are very low. I don’t see much risk of a cash crunch here, even if bosses are forced to cut rental rates for retail units.

Too soon to buy?

At about 620p, British Land shares currently trade at a 35% discount to their last-reported book value of 967p per share. There’s also a forecast dividend yield of 5%.

I suspect that these shares could be a decent long-term buy at this level. However, as a value investor I’m only interested in serious bargains. I plan to wait for the group’s half-year results in November before making a decision on whether to invest.

However, with the company having put in place what seems to be a sound business model following major restructuring in recent years, the prospects for the stock seem to be improving. As such, now could be the right time to buy it from an income perspective, with a smaller dividend share that reported positive news on Tuesday also offering investment potential.

Growth potential

The smaller company in question is property investor and developer Town Centre Securities (LSE: TOWN). It released news of an acquisition on Tuesday, purchasing The Cube in Leeds for £12m. Completion is set to take place in October, with the purchase due to be funded from the company’s existing resources and planned disposals. The deal represents an initial yield of over 12.5% on the passing income, although the yield will reduce to around 9% after lease expiries in 2019 and 2020. Still, this remains a relatively enticing level for a city-centre asset.

With Town Centre Securities having a dividend yield of 4.3%, it seems to offer income investing potential for the long term. Although the company is UK-focused and could experience some uncertainty in the near term due to Brexit, its acquisition pipeline means that it may be able to capitalise on low valuations across the commercial property sector. As such, and with a price-to-book (P/B) ratio of 0.8, it seems to offer an impressive investment outlook.

Improving business

Aviva’s income potential also appears to be impressive. The company recently announced that it has been able to generate excess capital that is expected to be deployed over the next two financial years. So far, this has helped to reduce the company’s leverage, while a portion of the capital has been earmarked for acquisitions. This could help to further diversify the company’s operations and may lead to improved growth performance over the medium term.

Due in part to its disappointing share price performance, Aviva has a dividend yield of around 6% at the present time. This is expected to rise to around 6.8% next year, with dividend growth of 13% forecast in the next financial year. Beyond 2019, further dividend growth could be ahead, with the potential for additional excess capital generation as well as a more generous payout ratio.

With Aviva having a price-to-earnings (P/E) ratio of around 10, the stock seems to offer a wide margin of safety. Alongside its international exposure, improving business model and rising dividend, this could help it to outperform the FTSE 100 in the long run. It seems to offer a strong income investing opportunity at the present time.

There wasn’t a lot wrong with the numbers. Net rental income of £370m, underlying earnings of 31.1p a share and a 25.5p dividend were all in excess of 6% ahead of the prior year, while EPRA net asset value (NAV) increased 5% to 776p a share.

Furthermore, the stock appears to offer good value. A rating of just over 15 times earnings isn’t unreasonable, a dividend yield of 5.4% is juicy and a 39% discount to NAV screams ‘bargain.’ So why on earth would I sell the shares?

Intu the future

On 6 December, Hammerson announced it had agreed a £3.4bn all-share offer to acquire FTSE 250 firm Intu Properties. If shareholders of both companies give the deal the go-ahead, it would create, in the words of the directors, “a £21bn pan-European portfolio of high-quality retail and leisure destinations.”

I wasn’t impressed by the deal. Hammerson had been deliberately reducing its exposure to the UK in recent years, but combining with Intu would up it again significantly. Intu’s debt would also weaken Hammerson’s balance sheet. Operating cost savings would be relatively low with potential refinancing synergies being the primary attraction. To me, it smacks of late-stage bull market M&A activity.

I’m not alone in being sceptical. The shares have fallen over 10% since the deal was announced and Hammerson is now flirting with demotion from the FTSE 100 to the FTSE 250. As I don’t see a compelling case for the deal but significant risk and organisational stress in executing it, I rate the stock a ‘sell’.

Long-term outperformer

I believe there’s a lot to be said for owning smaller, nimbler companies in the REIT sector. One I’d be happy to buy is Town Centre Securities (LSE: TOWN), which also released results today. It’s listed in the FTSE SmallCap index and has a market value of about £150m at a share price of 276p — little changed on the day but down from 300p when I wrote about it last September.

Established in 1959 and still run by the founding family, this Leeds-based property investor and car park operator has delivered excellent returns for its shareholders with a predominantly regional approach, playing to the strengths of its local knowledge and expertise.

It’s outperformed the FTSE All Share REIT index over any meaningful period you’d care to look at. For example, at the last reckoning, the compound annual growth rate of total shareholder returns over 25 years was 10.9%, compared with 8.3% for the index.

Today’s half-year results showed NAV at the period-end of 375p a share, trailing 12-month earnings of 12.8p and dividends of 11.5p. The resulting valuation metrics — a 26% discount to NAV, 21.6 times earnings and 4.2% dividend yield — are not as attractive as Hammerson’s on paper. However, I believe they’re attractive in their own right and that the risk/reward trade-off is skewed positively in favour of the well-managed smaller REIT.