Interactive Investor

City still bullish on prospects at these four small and mid-cap firms

A bunch of well-known companies have published results today, and despite a poor session for the wider market, analysts believe there’s reason to be optimistic about prospects.

6th September 2023 13:29

by Graeme Evans from interactive investor

Share on

Bullish 600

A bunch of well-known companies have published results today, and despite a poor session for the wider market, analysts believe there’s reason to be optimistic about prospects.

Market share gains by Halfords Group (LSE:HFD), a profits upgrade at Restaurant Group (The) (LSE:RTN) and stronger guidance from food supplier Bakkavor (LSE:BAKK) offered some cheer for small and mid-cap investors today.

The trio’s well-received updates came in a downbeat session for the wider London market, with another bout of interest rate jitters caused by oil’s ascent to over $90 a barrel blamed for the FTSE All-Share’s retreat towards where it was in March.

Cyber security artificial intelligence firm Darktrace (LSE:DARK) was among the leading fallers in the FTSE 250, despite a stronger-than-expected rise in annual profits to $41 million (£32.6 million).

The selling reflected new free cash flow guidance caused by a change in the timing of commission cost recognition. Commissions used to be paid 50% in the quarter they were earned, then 50% after 12 months depending on performance conditions.

To align with peers and better attract and retain talent, commission will now be 100% up front. Shares fell 13.5p to 355.7p, which compares with 250p when Darktrace priced its shares for the company’s much-anticipated IPO in April 2021.

Davy analyst James Musker has a target price of 400p, noting that the short-term hit to free cash flow had more than offset an otherwise strong set of 2023 results as the company benefits from a watershed year for artificial intelligence.

One of the best performances in the FTSE 250 index came from Bakkavor after the supermarket prepared foods supplier served up a profits upgrade.

It now expects an operating surplus of at least £89.4 million, some £4 million higher than City forecasts due to restructuring savings, a strong performance in the UK and a post-Covid volume recovery for its China business. Shares rose 3p to 102p.

Broker Peel Hunt has a price target of 115p, noting the benefit of improved trading visibility as cost inflation pressures begin to ease.

In the FTSE All-Share, Halfords has weathered the spending downturn in discretionary areas such as cycling and car cleaning through a focus on essential maintenance and servicing.

The standout performance in the 20 weeks to 18 August came from Autocentres achieving like-for-like sales growth of 16.6%, while needs-based products and services in the retail segment drove a strong motoring figure of 7.5%. Cycling, which now only represents 25% of total revenue, was down 2.7% on a like-for-like basis.

Trading in the year-to-date is in line with expectations, with a stronger second half performance set to mean pre-tax profits in the range of £48 million and £58 million. That compares with the previous year’s £51.5 million.

Peel Hunt said it was hard to predict too rosy a short-term picture but that the company's market share gains should bear fruit in time given a strategy that’s “bang on point”.

The broker has a price target of 275p, which compares with 190p after today’s 3.15p improvement. It said: “The shares reflect mostly bad news ahead, and that is just too harsh.”

Restaurant Group also reported robust trading as the Wagamama and Brunning & Price business upgraded guidance for the second time in this financial year.

The move followed a strong start to the third quarter, as well as today’s interim results showing a 10% rise in revenues to £467.4 million and 15% higher earnings at £36.3 million.

The company, which has faced break-up calls from an activist investor, added that it continues to explore strategic options to accelerate margins and reduce its debt ratio.

Shares got off to a strong start but later settled 1.2p lower at 42.5p. Investec Securities regards the company as “hugely undervalued” as it highlighted a 77p target price.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Get more news and expert articles direct to your inbox