Are Computershare Limited and Pepper Group Ltd at bargain prices?

Credit: Domiriel

Times are thin on the ground for investors who like falling prices, with yet another miniscule list of stocks at 52-week lows this week. It’s a sharp contrast with the list of 52-week highs, which was sizeable – and truth be told, investors are probably better off looking there for their value.

Still, here are this week’s most prominent new 52-week lows:

Computershare Limited (ASX: CPU) – last traded at $8.91, down 24% for the year

Computershare has had a bumpy ride, with a tough 2015 and an even worse 2016 knocking the company down from previous highs above $12. Investors were seemingly spooked by the decline in revenue, negative cash flows, and ongoing restructuring expenses at the latest half-year.

A recent mortgage servicing contract won will support earnings per share over the next seven years although recent sub-par performance might make investors wonder if there’s really a bargain to be found here.

Although a convincing investment thesis can be made, I don’t think there’s a sufficient margin of safety in Computershare’s price to account for the potential for continued underperformance and, accordingly, I am not a buyer right now.

Pepper Group Ltd (ASX: PEP) – last traded at $2.32, down 30% for the year

Pepper Group is an interesting one, like most mortgage lenders its shares have taken a haircut in the past year over investor fears about the residential lending market in Australia. Unlike most lenders however, Pepper also has interests overseas, including in China, Spain, South Korea, Hong Kong and others. Pepper Group is also involved in loan securitisation and warehousing facilities, as well as higher margin (read: higher risk) unsecured lending in Korea and Spain.

Bargain hunters might note that Pepper trades at a Price to Book (P/B) value of 1.16 times, which is substantially lower than the big four banks – Commonwealth Bank of Australia (ASX: CBA) trades on a P/B of 2.3 times, while National Australia Bank Ltd. (ASX: NAB) is the lowest at 1.3 times.

About 80% of Pepper’s loan risk is concentrated in Australia, and the level of impairment on Australian debt is very low – but investors should note that approximately 10% of total loans are ‘past due but not yet impaired’.

Now trading some 10% below its offer price, I see some potential value in Pepper Group but I would not recommend it to investors who aren’t willing to study its credit risk, and I won’t consider buying shares until I’ve done more of the same myself.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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