Why these battered value stocks are on my buy list

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RBS logo

Shares of Royal Bank of Scotland Group (LSE: RBS) rose by as much as 4% when markets opened on Friday.

The gains were driven by the news that the bank moved back into the black during the first quarter, with a net profit of £259m. That's five times better than analysts' forecasts for a £50m profit.

RBS reported good progress on both costs and growth. An increase in mortgage lending helped lift the bank's total income by 12% to £3,154m. Meanwhile, underlying operating expenses fell to £1,822m, down from £2,151m during the first quarter of last year. This helped to lift RBS's adjusted operating profit by 30% to £1,371m.

Bad debts were lower, with the bank's main measure of bad debt falling to 2.9% of loans, down from 3.1% at the end of 2016.

Of course, this favourable set of figures only represents a single three-month period. The bank still has much further to go to deliver on analysts' forecasts for a 2017 net profit of £2,133m.

Despite this, I believe RBS has now turned a corner. The majority of its problems are out in the open and on the way to being resolved. I also suspect that the Chancellor might start to consider reducing the government's 72% stake in the bank at some point after the general election.

RBS shares now trade at a 14% discount to their tangible net asset value of 297p, and on a 2017 forecast P/E of 13. Significantly, in my opinion, broker forecasts have turned positive. Earnings forecasts for the current year have risen by 15% to 19.4p per share over the last three months.

Forecasts for 2018 have also been upgraded, and dividend payments are expected to restart next year.

RBS is a significant holding in my own portfolio, and I remain a buyer after today's news.

A family-owned affair

Not all property stocks target top London addresses. There's plenty of money to be made by owning the right commercial property in cities such as Leeds and Manchester. That's what family-owned group Town Centre Securities (LSE: TOWN) does.

TCS has been trading on the London Stock Exchange since 1960. It has a record of stability many larger firms would envy -- the group didn't cut its dividend during the financial crisis, and didn't need to raise fresh cash from shareholders.

Town Centre's particular focus is mixed-use developments of shops, apartments and offices in central locations. Occupancy is high, at 98%, but fears about the outlook for the retail sector have weighed on the group's share price. TCS stock currently trades at a discount of about 20% to its December 2016 net asset value if 355p.

In fairness, some of this discount may be justified. Anecdotal reports suggest that retail rents are falling in many locations. TCS also maintains a fairly high level of gearing, with a loan-to-value ratio of 50%, compared to a more typical level of 30%-35%. Earnings growth has also been limited over the last five years.

Despite these risks, the outlook seems to be improving. TCS announced its first dividend increase for five years in 2016, giving the stock a forecast yield of 4%. In my view, this firm could be worth a closer look at current levels.

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Roland Head owns shares of Royal Bank of Scotland Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.