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Best cheap shares to buy in February 2023

What are the best value shares to buy next month?

Best cheap shares to buy in February 2023 Source: Bloomberg

With corporates continuing to face rising input costs and a possible recession, it can be difficult to find quality stocks to buy. There are numerous bargains but some may take a while to recover. Here are three cheap shares we think offer good value and resilience right now.

Dechra Pharmaceuticals could be a defensive option

Shares in the veterinary medicines provider are down 37% over the year to 2,712p. This is painful for existing shareholders, however, it could be a buying opportunity for new investors. Despite the share price slide, Dechra is performing well. The company develops and produces veterinary drugs and animal food stuffs and, as such, should be a relatively defensive option for investors in tough economic times.

Although levels of consumer spending on pets have levelled out since the impact of the Covid lockdowns, Dechra is still seeing reasonable growth. In its recent trading statement, the company says that despite strong comparative figures from last year, total group revenues in the second-quarter rose 14% at actual exchange rates, boosted by acquisitions.

Its European business generated growth of around 3% at actual exchange rates, while the international division was hit by the need to establish a new sales and marketing unit in South Korea. The company expects revenues to be weighted towards the second half of the year.

For the recent full-year, at actual exchange rates revenues grew 12.1% to £669.4 million, while pre-tax profits rose by 4.9% at actual exchange rates to £78 million (7.8% at constant exchange rates) including a £1.8 million contribution from acquisitions.
Its North American pharmaceuticals operation delivered revenue growth of 23.8% at constant exchange rates, while the European division grew sales by 8.2% at constant currency rates (4.7% at actual currency rates).

In its outlook statement, the company acknowledges “macroeconomic uncertainties” but says that the veterinary pharmaceutical market, especially the companion animal product sector, remains “resilient and in growth,” which should provide some comfort to investors. What’s more, the acquisition of Med-Pharmex has bolstered Dechra’s position in the US and that of Piedmont has boosted its clinical pipeline.

The shares are some way below their year highs of 4,288p seen in April last year and their five-year highs of 5,325p. However, analysts at broker Royal Bank of Canada think they could get to 4,000p, having trimmed their target on the shares from 4,200p in October.

Best cheap shares to buy in February Source: Bloomberg

Unilever shares could have further to climb

Shares in Unilever have had a good run and are up 7% in the past 12 months to 4,208p. However, there could be further mileage in them this year. While food producers are facing a cost squeeze right now, with rising wages and input cost inflation, analysts say branded companies like Unilever and Nestlé have the edge. This is because, with higher margins than more commoditised food producers, they have the ability to push through price increases and better absorb cost hikes.

In its third-quarter trading statement the company, which owns major food brands including Magnum and Marmite, increased its sales guidance for the year after underlying sales for the quarter rose 10.6% to €16.8 billion. As such, Unilever hiked its revenue guidance for the full-year to underlying sales growth of above 8%. The company managed to push through price increases of 12.% during the quarter and saw “limited” volume decline of 1.6%.

Its billion-plus so-called ‘Euro brands’, including Magnum, OMO, Lux and Hellmann’s, grew by 14% in the quarter. These products bring in 50% of turnover. Meanwhile, beauty and wellness sales grew by 6.7%, while those in personal care rose by 8.9%. Unilever expects underlying operating margins to come in at around 16% for the full-year.

At 4,208p, the shares are still some way off their three-year highs of 4,876p seen in September 2020. Analysts at broker Jefferies and Berenberg Bank recently set a target price of 4,800p on the shares. While inflation will continue to be an issue, it should begin to ease later this year.

Whitbread shares – showing resilience

Whitbread shares are down 5% for the year to 2,982p, but the restaurant, pub and hotelier’s recent third-quarter trading statement suggests it is demonstrating resilience in these tough economic times. The firm owns pub chain Whitbread Inns, Beefeater and Premier Inn. Many operators are struggling due to rising energy costs, however, Whitbread is benefiting from the loss of competition from smaller providers in the current difficult trading environment.

Premier Inn is recovering well from the Covid lockdowns and performing strongly. The hotel chain saw total accommodation sales rise 24% compared to the same quarter in 2022 and up 37% compared to the same period in 2020. London and the regions both saw a strong performance, with increased occupancy and higher average room rates.

Premier Inn Germany is also trading strongly, with 45 hotels now open in the country and another 36 openings planned. Food and beverage sales were 8% up on the same period last year, but still 4% behind the third-quarter in 2020. However, Whitbread says it is launching initiatives to boost sales.

Net cost inflation remains at around 7% to 8% in the full-year 2024, but the company says that 75% of its energy costs are hedged, while lower business rates will also help soften the blow. Nevertheless, it will make a loss of £40 million to £50 million this year. Meanwhile, current chief executive Alison Brittain is handing over the reins to new CEO Dominic Paul.

While the shares have had a good run since November, they are still some way off their three-year highs of 3,619p in March 2021 and five-year highs of 4,163p, seen back in February 2018. Analysts at broker Barclays have a price target on the shares of 3,500p, while those at Berenberg Bank think they could reach 4,000p.

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