When co-founders Jon Campion and Laurence Anderson set up APR Energy (APR) it’s unlikely they expected it to become a dividend stock.

APR was pitched as a disruptive force in the growing global market for temporary and emergency power, currently dominated by £4 billion giant Aggreko (AGK). The opportunity to pick up share in a growing market was one of the main reasons for coming to market in 2011. Its listing prospectus included lines like ‘Temporary power market exhibits long term growth dynamics’ and ‘Access to capital enables the Group to exploit significant growth opportunities’.

After a precipitous decline in its share price since late 2013, when it traded around £10 a share - a level at which Shares warned of downside risks (9 Jan ‘14) - APR is sitting at less than £3 a share and is on a dividend yield of 3.4%. That’s only just shy of the market average at around 3.9% - hardly what you’d expect for a challenger business in what should be a growing market.

Value highlighted

The dividend, of course, is not the main attraction of this stock and could even be cut when APR reports full year results early next year. Investors looking for a safe pay-out would be better off looking elsewhere. The elevated yield, however, does serve to highlight just how far APR has fallen.

Analysts at Jeffries reckon this lowly valuation is starting to look interesting. APR trades at just 0.6 times its 505p tangible book value, which is the value of a business’ tangible assets (property, plant, equipment and cash) minus its liabilities.

Will Kirkness at Jeffries has a ‘buy’ rating and a price target of 670p on the stock. His estimates look pretty conservative to us too.

Kirkness says the value of the mobile gas turbines APR bought from General Electric (GE:NYSE) in a $314 million acquisition last year look like they are carried on the books at too high a value. He says reducing the value of these assets by around 25% gives a more realistic tangible book value of about 380p per share, which he argues may provide some downside to the share price.

The logic of the current sub-300p valuation becomes stretched when you consider the following. Hypothetically, if another business bought APR at the current share price, it would recognise a profit on the acquisition of close to £100 million, known as a ‘gain on a bargain purchase’. To be clear, we are not aware of any bidders sniffing around APR at present.

Growth: MEDIUM

Power rental market expected to double between 2012 and 2017 (Source: APR).

Risk: HIGH

Frontier markets present risks to security of people, assets and payment.

Quality: HIGH

Management looks to have done an OK job in difficult circumstances.

Conservative forecasts

Kirkness’ earnings projections are also conservative. He says he has ignored management forecasts, pitching earnings forecasts 20% lower than guidance. Even at these levels, he says the significant discount to tangible book value and a free cash flow yield in excess of 20% indicates the market is not placing any value on APR’s existing contracts.

Kirkness forecasts sales at $490 million (£314 million) and profit before tax at $98.4 million, falling to $426 million and $79 million the year after.

Key risks at APR include its operations in frontier markets, including Libya, where it has sometimes experienced delays on payments. The security of its people and assets may also be at risk operating in markets like Iraq. It may also fail to renew contracts, leading to lower profitability in the future.

APR ENERGY (APR) 290p

Stop loss: 232p

Market value: £276 million

Prospective PE Dec 2014: 5.6

Prospective PE Dec 2015: 5.5

Prospective dividend yield: 3.4%

Bid/offer spread: 0.7%

Previous Shares view: Sell, 950p, 09 Jan 2014

Analyst price target: 385p - 670p*

*Liberum, Jeffries, Oct 2014