The best cheap UK shares to buy in September

What are the best cheap stocks to buy in September? We look at some of the options available to investors this month.

Babcock – on the road to recovery

Shares in Babcock haven’t had an easy ride this year – they are down 6% compared with BAE shares, which are up 31%, boosted by the flight to defensive stocks. However, the international defence contractor is in turnaround mode and making good progress.

The company recently returned to profit, posting full-year pre-tax profits of £182.3 million compared to a £1.8 billion loss in the same period in 2021. It has also delivered £20 million of cost savings and £400 million from business disposals, which it has used to reduce gearing levels.

Babcock says the market is currently “dynamic” due to the Ukraine war increasing government interest in bolstering their defence capability. Its contract backlog has increased by 21% to £9.9 billion, including £3.1 billion of the £3.5 billion Future Maritime Support Programme, supporting the Royal Navy, a French defence aviation training contract worth up to €500 million over 11 years and a nine-year MOD contract worth £100 million to deliver the new Defence Strategic Radio Service.

Like many other companies, it is not immune from inflation and is seeing the biggest effect on staff wages. However, Babcock recently agreed a pay deal with 85% of its employees. What’s more, the defence sector is considered a safe port to be in tough financial times. Barclays recently increased its price target on the shares from 356p to 358p, while JP Morgan Chase has a price target of 480p. At 333.2p, the shares are worth buying.

WH Smith – showing resilience in tough times

Shares in the retailer are down 17% this year to 1385p, yet the company has shown surprising resilience in the face of the recovery from the Covid-19 pandemic and the tough trading conditions in retail. The secret is its airport outlets. While the airline industry may be struggling with capacity amid staff shortages, WH Smith is seeing strong footfall in its airport-based travel shops.

The company told investors at its June trading update that travel was performing strongly across all three of its divisions and that it expected this momentum to continue into the peak summer holiday months. As such, it now expects the full-year results to be “at the higher end of analysts’ expectations.”

The company is seeing the recovery in trading taking hold across most of its business, with revenues in the 15 weeks to 11th June ahead of 2019 figures – at 107% of group sales recorded in that period. Its travel outlets at Chicago O’Hare airport and Las Vegas are also performing well and it sees further expansion opportunities ahead, with a number of new stores set to open.

“While the broader global economy remains uncertain, the Group is well positioned to capitalise on the ongoing recovery in our key markets and take advantage of the many opportunities ahead, including the 125 new stores won and yet to open, and our new store formats and category development across multiple geographies,” the company said at the June trading update.

The high street business is also performing well, up to 79% of 2019 revenues during the period, despite a cyber security incident with Funky Pigeon, boosted by Platinum Jubilee-related sales.

WH Smith is due to update investors on trading on 7th September ahead of the full-year results in November, which, if positive, could provide a boost to the shares. Barclays recently set a price target for the shares of 2180p.

Lloyds Banking Group establishing its comeback

Lloyds Bank is coming out of the shadows as its recovery gains momentum. The banking group, which had to be rescued by the government during the credit crunch, posted strong half-year results in July, with net income up 12% to £8.5 billion.

Lloyds, which owns Halifax, the UK’s biggest mortgage lender, is benefiting from the recent hikes in interest rates and the continued strength of the UK housing market. Loans and advances to customers increased by £7.5 billion in the first-half of 2022 to £456.1 billion, including the mortgage book, which rose by £3.3 billion to £296.6 billion. Meanwhile, customer deposits increased by £1.9 billion to £478.2 billion during the period.

The bank upgraded its earnings guidance at the results. Management now expects the banking net interest margin to be greater than 280 basis points, capital generation to be greater than 200 basis points, its return on tangible equity to more around 13% and its asset quality ratio to be below 20 basis points. However, operating costs are still expected to be around £8.8 billion, while risk-weighted assets at the end of 2022 should be around £210 billion.

Analysts at Deutsche Bank Aktiengesellschaft recently raised their price target on the shares from 61p to 64p, while those at Credit Suisse think they could hit 72p. The bank could be hit by the cost of living crisis and any weakness in the housing market, with estate agent Savills predicting a 1% drop in prices next year. However, trading on a price earnings ratio of 7, at 44p this may be in the price.