Interactive Investor

Eight top mid-cap shares

15th June 2021 15:13

Graeme Evans from interactive investor

Royal Mail is among the FTSE 250 firms highlighted in a favourite stocks’ list.

High-flying Future (LSE:FUTR), Royal Mail (LSE:RMG)and Howden Joinery Group (LSE:HWDN) were today backed for more success after a City bank added the trio to its eight-strong list of favoured UK mid-cap stocks.

The other newcomer to Deutsche Bank's line-up is Britvic (LSE:BVIC), with 888 Holdings (LSE:888)Countryside Properties (LSE:CSP), semiconductor firm IQE (LSE:IQE) and Wizz Air (LSE:WIZZ) keeping their places.

The semi-annual review comes after a robust period for the FTSE 250 index, which has now outperformed the FTSE 100 by more than 21% over the past two years. The mid-cap sector was hit hard in the Covid-19 market sell-down but has since seen a stronger recovery amid anticipation for positive earnings revisions and an increase in M&A activity.

Deutsche Bank said its revised list of top picks offered plenty of Covid recovery potential through Countryside, Howden and Wizz. There's also structural technology growth through IQE, plus a re-rating opportunity at Britvic, restructuring benefits from Royal Mail and M&A exposure with 888 and magazine publisher Future.

The revised portfolio comes with a premium price tag, given that the selection is trading on a price/earnings ratio of 17.9 times compared with the mid-cap average of 14.1 times. But there's a lot more growth, based on 16.2% compound earnings per share growth over three years set against 0.1% for the mid-cap index.

Much of this is concentrated in 888 Holdings and Future as the pair benefit from the pandemic accelerating the shift towards digital services. The latter has been the most successful UK media stock of the past five years, with its market value rising from £30 million to £3.5 billion under the impressive leadership of Zillah Byng-Thorne.

She has transformed the print-led specialist magazine publisher into a fast-growing online content company with a broad spread of revenue streams.

Deutsche Bank sees further upside potential, particularly in the wake of an encouraging start for recently acquired price comparison site GoCo. Noting that Future still trades at a sizeable discount to technology peers Rightmove (LSE:RMV) and Auto Trader (LSE:AUTO), the bank has raised its price target to 3,321p for a potential further upside of 13.3%.

Future's share price rise of 69% this year is only beaten in the mid-cap sector by Hammerson (LSE:HMSO) and Royal Mail, with the parcel delivery firm's 76% jump sufficient to earn a place in the FTSE 100 index earlier this month.

Deutsche Bank's analysts believe there's potential for Royal Mail to add another 28% to 763p, based on its special situation recovery and scope for further re-rating as the company benefits from the online shopping boom.

The addition of Howden Joinery offers exposure to the housing market and pandemic recovery through a 30% market share as the largest supplier of kitchens in the UK.

Shares have risen sharply but Deutsche Bank sees an upside to 890p due to Howden's attractive business model and sector-leading margins, which should improve over the next three years.

Britvic, which bottles Pepsi products and sells brands including Robinsons, Tango and Fruit Shoot, returns to the City bank's preferred mid-cap list with a price target of 950p. The stock is viewed as an attractive defensive consumer play, trading at a marked discount to its peer group.

IQE, which has recently seen profit taking after a strong run, remains on the list for its links to smart phone adoption and 3D sensing. Countryside and Wizz are included as direct beneficiaries from the vaccine roll-out, while exposure to online gaming is kept through 888.

The online poker and casino company keeps its place despite being the list's best share price performer since last November with growth of 52.4%. Deutsche Bank sees further upside of 24% to 490p, given the company's potential role in further industry consolidation.

Despite 888's strong performance, Deutsche Bank's choice of top eight mid-caps has lagged the wider FTSE 250 index over the past six months after Trainline (LSE:TRN) shares fell by more than 40% on the back of the UK government's plans for a rival ticketing app.

The list's rise of 6.5% for the period compares with 15.9% for the FTSE 250 but Deutsche Bank's overall performance since the start of 2020 is still ahead of the second-tier benchmark. 

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