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Lack of adequate analysis is keeping the London Stock Exchange's most undervalued companies down, as they are covered by on average just half of the analysts covering the market as a whole, according to the 2008 Hidden Gems Report, released by business and financial adviser Grant Thornton.

Below-par share price

Following on from the firm's recently published Hidden Gems Index, the report examines the top fifty undervalued companies on the London Stock Exchange for factors contributing to their below-par share price.

One factor in particular was common to almost all 50 businesses: lack of interest from analysts. In fact there was on average just 8.5 analysts per top 50 undervalued company, compared with a market average of 17.

David Maxwell, National Management Partner at Grant Thornton, said the results were a clear signal that attracting enough quality analysts was crucial in the battle for investor confidence.

"While there is more information available to investors than ever before, high quality insight from registered analysts is what investors thrive on. While analyst coverage is only one component of value creation, the strong correlation between how many registered analysts cover a company and its value shows this is a crucial factor," he added.

Positive analysis 

The report indicates certain industries had even less representation. Support services and food producers were the two worst-off areas this year, with less than a quarter of the average number of analysts covering undervalued companies in each sector; 27 versus six and 25 versus four respectively.

"We advise clients to make every attempt to attract analysis if they are confident they have a good story to tell. Positive analysis is more likely to come to a company whose financial model is clear, whose strategy is well explained and whose prospects are visible," Maxwell said.

The report found that apart from their business fundamentals and the number of analysts covering a firm, issues such as relative company size, the liquidity of shares and sector classification all had an impact on value.

Media profile 

Maxwell said companies that were looking to strengthen their share price should be putting significant resources into both attracting analysts and creating a media profile in this age of media driven business agendas.

The 2008 Hidden Gems Report highlights the Top 50 UK FTSE All Share companies whose share price does not reflect the strength of their cash flow characteristics.

These 50 companies created £80 billion in shareholder value over the 12 month period examined by the research, compared with a fall of £170 billion for the FTSE All Share in the same period.

The Report offers 10 stories of Hidden Gem companies in detail, including British Airways, Care UK, Diploma Plc and National Grid.

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Related links

• Grant Thornton