Interactive Investor

Halfords and Hut Group demonstrate recovery credentials

21st June 2023 15:48

by Graeme Evans from interactive investor

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Trading well below their previous best, this pair of popular stocks could generate attractive returns for investors, argue City analysts.

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Interest in the recovery potential for shares in Halfords Group (LSE:HFD) and Hut Group owner THG Ordinary Share (LSE:THG) picked up today after both companies revealed signs of operational progress.

Halfords shares added 10p to 201p after the motoring services-to-bicycles retailer said the new financial year had started well amid market share increases in all categories.

Broker Peel Hunt raised its price target from 250p to 275p and went from an “add” recommendation to “buy” after it said the shares were decidedly cheap based on the forecasts given by management alongside annual results.

Today’s underlying profit figure came in 38% lower at £51.5 million for the year to 31 March, but Halfords boss Graham Stapleton is comfortable with City expectations for an improvement this year to £53.3 million.

Stapleton expects profits to go up a gear in 2025 as the company moves towards the mid-term expectation of £90 million-£110 million outlined at its capital markets day in April.

As part of a strategy overhaul, Stapleton has heightened focus on products and services that tend to be needs-based rather than discretionary.

Recent acquisitions such as Lodge Tyres mean the company is now the largest commercial tyre service provider in the UK, with service-related sales representing 48% of today’s total revenues of £1.6 billion.

Peel Hunt said: “The switch towards a more service-oriented model is working well, and as  acquisitions begin to throw off synergies, these can be added  to the other cost savings and tailwinds that are emerging from 2025.”

This progress is offset by concern over the consumer outlook as mortgage costs rise, meaning that the broker is keeping a lid on profit upgrades for the time being.

E-commerce firm THG also drew favourable City comment today after highlighting a significant increase in first-half profitability and better-than-expected cash flows.

THG has seen a particularly strong start to the year for the Myprotein nutrition division, which is reaping the benefit after supporting customers on pricing during the cost of living crisis. Commodity costs have also eased, meaning further margin progress is expected in the second half of the year.

Beauty brands including Lookfantastic have focused on profitable sales, while the THG Ingenuity e-commerce platform has continued to make good progress building its client base across higher value enterprise accounts.

The progress helped shares to rally 6.9p to 79.8p, still short of May’s peak of 118p when takeover speculation fuelled the stock from less than 50p at the start of 2023. They originally listed at 500p in September 2020’s high-profile listing.

Analysts at Jefferies today raised their price target by 10p to 95p and said the major cost inputs that contributed to earnings downgrades through 2022 are now turning into tailwinds. They also highlighted the “considerable value and growth potential” in the group’s market-leading strategic assets.

Progress on the corporate governance front also helped sentiment today as the company looks to secure a premium London listing for its shares. This would mean entry to the FTSE 250 index based on a current valuation of just below £1 billion.

The roles of chief executive and chairman have already been split while founder and boss Matt Moulding today relinquished the golden share he has held since the flotation.

Barclays said the update on corporate governance was just as important as evidence of operational momentum as it reinstated an equal weight rating with a price target of 87p.

However, it has an upside case of 180p should the better delivery on forecasts continue. The bank said: “In our view, this investment case is about proving to the market that operational performance can sustainably improve with a path to free cash flow generation and better growth. We think this statement is a positive step.”

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.

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