Value names are in focus as rates rise and investors rotate from growth. A City firm has published its 34 favoured picks.
The best value names for a potential stock market rotation in 2022 have been disclosed by a City firm, with Whitbread (LSE:WTB), FirstGroup (LSE:FGP) and Redrow (LSE:RDW) among 34 companies on its list.
Peel Hunt's line-up boasts a median market capitalisation of £740 million and trades on an average forecast 9.7 times earnings in 2022, falling to nine times in 2023.
Value stocks have been out of favour in recent times, but 2021 proved to be more successful after the 31 firms chosen by Peel Hunt's analysts delivered an overall return of 27.8%.
Inflation and the rising interest rate environment means there now looks to be more of a tailwind behind value and cyclical stocks as investors rotate away from the growth sector.
The biggest stock on the value list is Premier Inn owner Whitbread, which Peel Hunt believes is not getting the credit it deserves for owning the UK's leading hotel brand and having a rock solid balance sheet that allows it to invest in its estate.
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Some 59% of Whitbread's hotels are freehold, with their overall worth based on an estimated yield of 4.5% to 5% not far short of the current market cap at £6.4 billion. They also make the company potentially appealing to any private equity buyer with access to cheap debt.
Further encouraged by Whitbread's recent progress on expansion in Germany, Peel Hunt thinks shares should be trading at 3,600p rather than the 3,169p seen at the end of last week.
The next two largest value stocks on the list come from the housebuilding sector after the inclusion of Vistry (LSE:VTY) and Redrow, with price targets of 1,420p and 900p respectively.
Vistry performed well in 2021 but Peel Hunt believes there's more to come based on the growth potential in the Partnerships business and confidence about dividend plans. The shares trade with a price/earnings (P/E) multiple of 7.9x and dividend yield of 6.3%.
Redrow shares rose 23% in 2021 but the broker thinks the value gap with the rest of its peers is still too large as the builder opts to push harder on prices and ease back on volume growth. On 2022 forecasts, Redrow trades at a sector low P/E of 7.4x and dividend yield of 4.5%.
One of the biggest potential share price upsides on Peel Hunt's list comes from infrastructure services business Kier (LSE:KIE), which is backed to reach 200p from Friday's 110p as the benefits of last year's equity raise continue to be felt.
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The broker said: “We expect 2022 to further demonstrate the strong outlook for organic revenue growth, margins, and cash returns. As this becomes better recognised by investors, we see the potential for a material rerating.”
RHI Magnesita (LSE:RHIM), whose refractory products are used in all the world's high-temperature industrial processes, has been backed to go from 3,460p to 5,000p as it benefits from the strong market outlook for steel and a backdrop of broader supply chain pressures.
Peel Hunt is also looking for further momentum at Halfords (LSE:HFD), which it described as “cheap from every angle” after a year of trading progress when the retailer won market share and boosted profit guidance. Shares were 357p on Friday but the broker sees a “very material upside” to 525p based on scope for a P/E close to 15 times.
Among other well-known stocks on the list, Peel Hunt has confidence in the recovery of FirstGroup after calling the bus and rail operator's shares “ridiculous value”.
Omicron has temporarily stalled progress but regional bus demand is likely to resume its turnaround as restrictions ease and confidence returns, with 10% margins achievable in the first full year following the pandemic. Capital returns of more than £500 million are possible and Peel Hunt notes there's over 20% upside to its “conservative” 125p target price.
Wickes (LSE:WIX) is also highlighted after Peel Hunt said the market had failed to appreciate the company's leading position in the UK DIY market and potential for continued growth into the medium term.
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Despite its strong underlying performance, Wickes' valuation lags its peers in the repair, maintenance and improvement sector on 9.3 times 2022 earnings. It believes the shares should be trading at 370p compared with 234p on Friday.
Another stock identified by Peel Hunt as having a low valuation compared with its peers is logistics firm Wincanton (LSE:WIN). The 500p target price represents a 36% upside as the company moves towards higher growth and margin areas such as high-volume e-fulfilment and two-person home delivery.
The target price is based on 12.5 times 2023 earnings, which is a much lower multiple than those including Clipper Logistics (LSE:CLG) on 23x.
Peel Hunt also highlights the appeal of FTSE 250-listed life sciences investor Syncona (LSE:SYNC), which recently generated £334 million from the sale of gene therapy business Gyroscope Therapeutics to Swiss drugs giant Novartis.
Despite this deal, the broker believes the market still “deeply discounts” the value to be had from Syncona's private assets. It raised its price target from 279p to 286p, which compares with 212p last week, and said that the company had shown it can “consistently pick the winners”.
The broker added: “In Syncona, we see an excellent way for the generalist to play pipeline biotech: a company run by specialists with a track record of company building, academic excellence, and corporate execution.”
The other value stocks on Peel Hunt's list are Bank of Georgia (LSE:BGEO), Capital & Counties (LSE:CAPC), CLS Holdings (LSE:CLI), CMC Markets (LSE:CMCX), Coats (LSE:COA), Empiric Student Property (LSE:ESP), Essentra (LSE:ESNT), Forterra (LSE:FORT), Headlam (LSE:HEAD), Ibstock (LSE:IBST), Just Group (LSE:JUST), Keller (LSE:KLR), Kenmare Resources (LSE:KMR), Marston's (LSE:MARS), MITIE (LSE:MTO), Moneysupermarket.com (LSE:MONY), NCC (LSE:NCC), Ocean Wilsons (LSE:OCN), Pan African Resources (LSE:PAF), Premier Miton (LSE:PMI), Renewi (LSE:RWI), Serica Energy (LSE:SQZ), Tharisa (LSE:THS) and TI Fluid Systems (LSE:TIFS).
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