Potential bid target20 Mar 2022 23:08
A cheap UK stock
Private equity funds like to buy businesses that generate plenty of cash. One company that’s on my radar at the moment for its strong cash generation and low valuation is electrical retailer Currys (LSE: CURY).
In addition to the well-known UK business, Currys also has market-leading retail brands in Scandinavia and Greece. The company’s turnaround under Alex Baldock has seen profits start to recover and cash flow improve significantly.
With the Currys share price currently under 90p, this FTSE 250 stock trades on just 8.5 times forecast earnings, with a 4% dividend yield. Although profit margins are quite low, this seems attractive for my portfolio, especially as Currys generates plenty of cash.
Indeed, Baldock says that by 2023/24, Currys should be generating £250m a year of sustainable free cash flow. Currys’ current market-cap is just £1bn, which means that the shares are potentially trading on just four times forecast free cash flow. That would be exceptionally cheap, in my experience.
We don’t yet know if Baldock can hit this ambitious target. One risk is that Currys will always be forced to compete on price against lower-cost online operators, including Amazon.
However, I’m encouraged by the group’s recent performance. I think Currys is big enough to continue doing well.
Takeovers are completely unpredictable, so I would never buy a stock purely because I thought it might receive a bid. But I could certainly see a private equity buyer taking an interest in Currys.
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