Interactive Investor

FTSE 250 winners: Royal Mail and two cheap mid-cap shares

A day after a grim session for the UK stock market, a bunch of mid-cap shares are among those bouncing back following a tidal wave of trading updates. City writer Graeme Evans reports.

18th January 2024 14:10

Graeme Evans from interactive investor

New-year jitters for Royal Mail investors eased today as owner International Distributions Services (LSE:IDS) joined the FTSE 250 pacesetters in a packed session of trading updates.

Alongside the delivery firm, shares in builders’ merchant Travis Perkins (LSE:TPK) and speciality chemicals firm Elementis (LSE:ELM) also rebounded after their performances reassured the City.

The updates and profit upgrade by Currys helped the FTSE 250 index to outgun the FTSE 100 as the mid-cap benchmark put back just under half yesterday’s slide of 328 points. 

The shares of IDS rose 8.4p to 254.3p, having fallen 10% earlier in 2024, as Royal Mail reported its best seasonal operational performance for four years. It said it delivered over 99% of first and second-class items posted by the last recommended Christmas dates. 

Total parcel volumes increased by 21% to 387 million and revenues by 14.4% in the December quarter, reflecting ongoing efforts to win back customers lost during industrial action and the favourable comparisons with 15 strike dates in 2022.

Stamp price rises helped offset the return of letter volumes to the long‐established pattern of 6‐8% annual declines as revenues rose 11.8%. However, costs continue to increase as a result of inflation, pay awards and the high fixed costs of delivering the Universal Service.

Regulator Ofcom is shortly due to publish its options for reform of the Universal Service, which requires postal staff to deliver letters six days a week to every address in the UK.

IDS chief executive Martin Seidenberg said today: “We are doing all we can to transform, but it is simply not sustainable to maintain a delivery network built for 20 billion letters when we are now only delivering seven billion."

Across the group, which also includes the European logistics business GLS, revenues for the third quarter rose 9.8% and by 3.8% in the nine months of the financial year.

This means the company expects a second‐half operating profit to broadly offset the £169 million loss in the first half, a performance that excludes voluntary redundancy costs. 

UBS, which has a price target of 290p, said the unchanged guidance pointed to higher UK operating costs as the figures on parcel volumes and third quarter revenues were well ahead of its expectations.

The bank said there were no signs of a meaningful headwind from the recent loss of Royal Mail’s monopoly position on the delivery of parcels from Post Office branches. 

It also expressed surprise at the appointment of Michael Snape as chief financial officer in place of Mick Jeavons, who has left the board with immediate effect. Snape is the former finance boss of Boots and prior to that the international CFO for Tesco.

Seidenberg said: “Michael brings extensive turnaround experience and excellent financial leadership gained in a number of leading international companies during their transformation.”

IDS shares floated a decade ago at 330p and peaked at 630p during the pandemic. However, they were 173p by autumn 2022 as loss-making Royal Mail struggled to deliver planned productivity improvements against a backdrop of poor industrial relations.

The shares bounced at the end of 2023, only to lose most of these gains in the opening fortnight of this year. 

Travis Perkins investors have also experienced a difficult start to the year, although today’s in-line guidance for a 2023 operating profit of around £180 million provided reassurance following October’s profit warning. 

There’s limited commentary, apart from that market conditions are anticipated to remain subdued and that management is looking to generate savings worth an annual £35 million.

The shares are up 1% over the past three months, which Peel Hunt notes compares with a 15% rise in the wider sector. The stock is on 13.3 times forecast 2024 earnings with a 4% dividend yield.

The broker said: “Given the cyclicality of the industry, we believe there is deep value on offer at Travis Perkins. The group remains the UK’s largest merchant, and operational gearing should be meaningful as volumes recover. Obvious catalysts are somewhat lacking, however.”

At Elementis, shares rebounded 7p to 124.6p as the supplier of performance-driven additives reported stronger profit and revenue growth compared with a weak quarter in 2022.

In a brief update, it now forecasts profits slightly ahead of expectations in the range of $102-$104 million (£93.8m-£95.6m) and up on the prior year’s $100.5 million.

UBS, which has a price target of 150p, said the company’s discount to the diversified chemicals sub-sector “appears harsh” given significantly lower price cyclicality, a notably higher earnings margin, and lower capital expenditure intensity.

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