Best cheap UK shares to buy in January 2023

It’s clear that 2023 will be another difficult year for investors. However, with economists at the Bank of England now saying that inflation may have peaked and – tentatively - that interest rates may begin to fall next year from late spring, there could be some share buying opportunities ahead.

Here are three company shares we think may be worth looking at for the New Year.

Next Group – ripe for recovery?

Shares in Next are down 25% this year to 5,810p. They are also 31% off their five-year highs, previously seen in December 2021, of 8,440p. Earnings have been hit by the devaluation of the pound and the fashion retailer cut its full-year pre-tax profit forecasts in September from £860 million to £840 million.

However, this is a quality, well-run company. The retail industry is facing tough times, but Next is a strong brand and the shares should benefit from any recovery in sales next year. The retailer had a strong first-half, according to the half-year results in September, with full-price sales up by 12.4% to and pre-tax profits up 16% to £401 million. But since the cost of living crisis has bitten, sales have softened over the late summer and autumn.

In its November trading statement, the company said sales in the 13 weeks to 29th October rose by 0.4% compared to the same period last year. Full-price retail sales in the UK and Ireland were up by 3.1% in the period, although online sales were down 1.9%.

The critical next step will be how the Christmas sales perform, which investors will hear more about on the 5th January, when the company reports its festive trading figures. Next recently bought fashion brand Joules and furniture firm Made.com out of administration. However, Joules’ products won’t appear on Next’s Total Platform until 2024 due to warehousing issues.

One concern is Next’s debt levels, which increased at the half-year from £600 million to £700 million. However, as mentioned earlier, it is beginning to look as though Bank of England interest rate rises may have peaked and economists think inflation is set to dip next year.

Analysts at broker Barclays recently cut their price target on the shares from 8,100p following the recent cut in earnings guidance. However, they still think the shares, which current trade on a price earnings ratio of just 10.6, could reach 7,000p. As such, the shares are a long-term buy.

Howden Joinery – surprising on the upside

Shares in the company are down 31% this year to 588.8p on concerns about the expected five to 10% dip in the UK housing market in 2023 predicted by Savills and other estate agencies.

However, Howden’s continues to grow its revenues and profits. Indeed, the company reported in its November trading statement that revenues at its UK depots rose 6.6% year-on-year. Meanwhile, from 11th June to 29th October, total sales were up 44.7% compared with the same period in 2019 – and up from a growth rate of 38.1% in the first-half of the year.

In the international business, revenues rose 24.5% compared to the same period in 2021 and were up 95.4% on 2019. The company described this as a “record performance” in its key peak trading period.

As such, Howden’s increased its earnings guidance for the full-year to slightly above that of previous consensus analysts’ forecasts of profit before tax of £387 million.

Chief executive Andrew Livingston says that Howden’s is continuing to gain market share and that its trade customers have “remained busy into the autumn with a good pipeline of work”. Despite high inflation and interest rates, the company says consumers continue to invest in upgrading their homes and kitchens.

The company’s low debt levels are also reassuring. It recently arranged a credit facility worth £150 million but has yet to draw upon it.

Analysts at broker Deutsche Bank Aktiengesellschaft recently trimmed their price target on the shares from 937p, but maintained their buy recommendation on them and now think the shares could reach 800p.

Ashtead Group – US infrastructure beneficiary

Shares in equipment hire group Ashtead have declined by 22% this year to 4,803p. The shares were previously on a price earnings ratio of 28 but now trade at 13 times earnings. However, analysts at Liberum think the shares could benefit next year from major infrastructure projects, particularly in the US.

“… Ashtead… is overweight in commercial and infrastructure building in the US, where any cyclical weakness will be offset by help from mega-projects and US government largesse,” analysts at the brokers note.

"During its de-rating, earnings estimates have improved by around 18%. Delivery of earnings in line with estimates should drive improved valuation from lows, while its growth characteristics might become more valuable if bond yields stabilise."

Recent half-year results in December were positive, with revenues up 26% and pre-tax profits up 35%. Ashtead says it is seeing “ongoing momentum in robust end markets”. US rental revenue increased by 28%, with 20% of that organic. Meanwhile, bolt-on acquisitions generated 6% sales growth. The company says its $1.7 billion investment in its existing locations and $609 million on acquisitions means it is well placed to benefit from “substantial structural growth opportunities”.

Debt levels are a concern, however, at the half-year net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) reduced from 1.6 to 1.5 times.

Analysts at Liberum have a price target on the shares of 5050p. Meanwhile, analysts at Barclays think the shares could reach 6,000p.

Take your position on 17,000+ shares with the UK’s No.1 platform.* Learn more about trading or investing in shares with us, or open an account to get started today.
* Best trading platform as awarded at the ADVFN International Financial Awards 2022