The UK market has made strong gains so far in 2021, but there are still plenty of dirt-cheap shares to buy. There are options for me right across the market, from blue-chip giants to obscure smaller companies.
In the FTSE 100, I think £60bn megacap British American Tobacco (LSE: BATS) is great value right now. In the mid-cap FTSE 250 index, gold and silver producer Hochschild Mining (LSE: HOC) also looks dirt-cheap to me. And I reckon £100m AIM-listed Inland Homes (LSE: INL) is a real bargain-basement buy in the small-cap space.
Growth in the face of risks
There’s no denying British American Tobacco faces risks from rising health awareness and tightening regulation. Equally, these risks have been running for decades and the company’s been resilient in the face of them.
Over the last five years, it’s grown its earnings at a compound annual growth rate (CAGR) of just shy of 10%. Dividends have increased at a CAGR of 7%.
Low earnings multiple and high yield
Earnings will likely advance at a somewhat lower rate for the next few years. The company is investing in its fast-growing — but currently loss-making — ‘new categories’, including vapour and heated tobacco. However, management sees a “clear pathway” to new-categories profitability by 2025.
BATS is valued at less than eight times 2021’s forecast earnings and has a dividend yield of 8.6%. For me, this more than compensates for regulatory risk and a phase of lower growth.
Shaping up well
Gold and silver producer Hochschild Mining is another UK share I’d like to buy right now. It currently operates three underground mines (two in Peru and one in Argentina).
Output last year (24.9m silver equivalent ounces) was impacted by Covid-related stoppages. However, 2021 is shaping up well. The company recently said it’s “firmly on track” to meet its target of 31-32m ounces.
Growth at a cheap price
In addition to a big bounce-back in earnings this year, analysts have pencilled-in further strong growth (27%) next year. HOC trades at just 8.1 times the forecast earnings. The price-to-earnings growth (PEG) ratio of 0.3 is also deeply to the ‘good value’ side of the ‘fair value’ marker of 1.
The forecasts rest on current expectations for gold and silver prices. There’s a risk these could change for the worse. However, I think HOC’s strong (net cash) balance sheet and dirt-cheap valuation provide me with a wide margin of safety.
My third dirt-cheap share to buy
Inland Homes specialises in acquiring brownfield land and enhancing its value by securing planning permission for residentially-led development schemes. It builds open-market and affordable homes, and also profits from selling surplus consented land to other developers.
The company has quite a high level of borrowings, due to a period of rapidly growing its land bank before the pandemic struck. This represents a risk. However, one of management’s key objectives is “to continue the progress we are making on the reduction of our net debt,” and I think Inland’s current valuation is compelling.
At the last reckoning, the company’s net assets stood at £168m and the development value of its land bank at over £3bn. How much is the market valuing the assets and development value at the current share price? Just £107m. To my eye, there’s considerable value in this small-cap stock waiting to be unlocked.
