Interactive Investor

Five stocks helping FTSE 250 index fightback

20th July 2023 13:28

Graeme Evans from interactive investor

The struggling mid-cap index’s return to a level last seen in March owes much to bullish noises from this handful of UK firms. City writer Graeme Evans runs through the important updates.

Heavy buying of mid-cap stocks continued today as updates from Dunelm (LSE:DNLM), Howden Joinery (LSE:HWDN) and Premier Foods (LSE:PFD) helped to underpin this week’s inflation optimism.

The FTSE 250 index was Europe’s stand-out stock market performer yesterday, having jumped 3.8% in its best session for eight months as traders revised rate rise expectations in the wake of UK inflation dipping to 7.9%.

Positioning by investors in readiness for a potential turn in the cycle extended into today’s session as the mid-cap benchmark added another 0.7% by midday.

The return of the FTSE 250 to a level last seen in March owed much to the support of earnings guidance during a busy session for mid-cap trading updates and results.

Support services firm Babcock International (LSE:BAB) led the FTSE 250 after its annual figures ticked off more progress in its turnaround, including better-than-expected cash generation, margin expansion and double-digit revenue growth.

The company also expects to reinstate dividend payments during the current financial year after a three-and-a-half-year hiatus. Its longer-term prospects are enhanced by a reshaped portfolio where 68% of 2023 revenues came from the defence market, which Babcock expects to steadily increase over time.

David Lockwood, who has overhauled the balance sheet since becoming chief executive in 2020, said: “Babcock is now a higher-quality, lower-risk and more predictable business, with a clear focus on execution.”

The shares, which were 210p in autumn 2020, stood at 346.2p today.

Babock shares were just ahead of the ventilation products firm Volution, which eased worries over the impact of weaker conditions in the construction and refurbishment sectors by upgrading its earnings per share guidance for the year to 31 July.

It expects organic revenues growth on a constant currency basis of approximately 5%, with the UK residential market delivering the strongest performance.

One factor supporting shares has been increased awareness of the importance of indoor air quality, as well as the regulatory backdrop focused on decarbonising buildings.

Shares jumped 22.2p to 404.4p, having fallen 10% in the past three months on worries over how much higher interest rates might impact levels of activity.

There was also reassurance over recent trading from homewares chain Dunelm, which nudged up the City’s profit expectations for the year to 1 July after sales defied the June heatwave to rise 6% to £381 million in the fourth quarter.

Peel Hunt increased its full-year profit forecast by £5 million to £189 million, adding that the City’s valuation was too influenced by the potential impact of higher interest rates.

The broker said: “Dunelm is not correlated to the housing market and the group continues to take market share, with the sharpening of price points in Q4 only serving to further improve the group’s value credentials”.

Yielding 9% and trading on 14 times earnings, the shares are a “core buy” according to Peel Hunt based on a price target of 1,375p. The stock rose 24p to 1,137p today.

The broker also regards Howden Joinery as a “quality business”, having seen the kitchens supplier deliver interim results in line with expectations.

Profits were 23% lower on 2022’s record performance at £111.9 million, but with the company's chief executive Andrew Livingston optimistic of “further success” in a second half that includes the autumn peak trading period.

He added: “Our trade-only, in-stock model is hard to replicate and compete with, and we are continuing to invest in our strategic initiatives to drive growth.”

A robust balance sheet meant a further £32 million was spent on projects including nine new depots as well as the reformatting of 28 depots in the UK.

The shares have rebounded 27% this year but added 28.4p to 739.2p after today’s results. Peel Hunt has an “add” recommendation and 770p target.

Meanwhile, Mr Kipling maker Premier Foods added to the positive mood in the FTSE 250 today when it said a strong sales performance in the first quarter meant it now expected a full-year trading profit at the top end of market forecasts.

The shares, which were 97p last autumn, rose 1.8p to 129.4p as Premier reported 21% growth in sales over a year earlier. It believes the period of significant input cost inflation is now past its peak, adding that it has no further price increases planned for the rest of 2023.

Looking to the medium term, it expects to unlock “further significant shareholder value” as it builds on its core UK business through expansion in new categories, overseas markets and other opportunities.

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