Interactive Investor

FTSE 250 in record territory as earnings please investors

3rd August 2021 13:48

Graeme Evans from interactive investor

The little brother index continues to outshine the FTSE 100 as a batch of strong earnings updates keep its good run going.

Earnings rather than deal-making kept the FTSE 250 in record territory today as mid-cap investors focused on income prospects at Direct Line Insurance (LSE:DLG) and Domino's Pizza (LSE:DOM).

Better-than-expected first-half results and a dividend yielding 7.5% ensured the Churchill insurer's shares rose more than 5%, while pizza business Dominos was up 3% after it promised shareholders £136 million of surplus capital through buybacks and dividends.

Their performances, alongside results-day gains for insurer Hiscox (LSE:HSX) and industrial threads business Coats (LSE:COA), ensured another positive session for the FTSE 250 index, which has been trading at record levels after a flurry of mid-cap takeover deals.

Aerospace and defence supplier Meggitt (LSE:MGGT) kept the M&A pot boiling on Monday when it revealed it had backed an offer worth £6.3 billion from Ohio-based Parker-Hannifin at a 70% premium to Friday's closing price.

Fund administration business Sanne (LSE:SNN) is also at the centre of a £1.5 billion takeover battle after disclosing an approach from a private equity firm, while others from the FTSE 250 in the spotlight in recent days have included Ultra Electronics (LSE:ULE), Morrisons (LSE:MRW) and Vectura (LSE:VEC).

There was a pause in the takeover action today, giving investors the chance to focus on the impact of Britain's pandemic re-opening on earnings progress.

Direct Line lost ground during the lockdown because it refused to cut car insurance prices by as much of its rivals, resulting in half-year gross written premiums in its motor division falling 6.2%.

That reduced to 1.6% in the second quarter, with the company now in a better position to benefit as car usage normalises and claims inflation trends starts to moderate.

The rest of the business covering its commercial, home insurance and rescue divisions has already returned to growth as Direct Line delivered half-year profits well-ahead of expectations at £261 million, aided by favourable weather conditions.

Its solvency position is strong in support of the chunky yield, with today's dividend amounting to 7.6p a share.

Analysts at Peel Hunt have a price target of 330p as they note Direct Line's current forward price multiple of 11.5 times earnings is at a significant discount to peers.

The broker added: “While we need premium momentum to return across the motor book, we believe Direct Line is well positioned to manage the challenges of exiting lockdown.”

Elsewhere in the insurance sector, shares in Hiscox rose 7% to 923p after its half-year profits of $133 million beat City forecasts by a considerable margin.

There was also a return to dividend payments as the business insurer delivered a strong underwriting performance, prompting analysts at UBS to reiterate their price target of 1,124p.

The 2% rise for Domino's Pizza shares to a record 431p came as it reported more strong trading, driven by online initiatives and a “supercharged” marketing campaign.

Half-year profits rose 28% to a bigger-than-expected £60.8 million, while the extended involvement of England's football team in Euro 2020 has ensured a strong start to the second half of the financial year.

Peel Hunt raised its earnings forecast by 6% and said the company's five-year plan to increase system sales from £1.3 billion to at least £1.6 billion underpinned a price/earnings rating above 20 times. They have a price target of 475p.

Thread manufacturer Coats was another FTSE 250 index riser, lifting 3% or 2.2p to 73.2p, as it reported encouraging recovery momentum in apparel and footwear alongside a strong performance in performance materials.

The company, which declared an interim dividend of 0.61 cents, continues to anticipate full-year trading moderately ahead of previous expectations.

Peel Hunt said the stand-out feature in the results was the increase in the apparel and footwear margin to 15.5%, which is ahead of the pre-pandemic level. The broker has a price target of 85p.

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