Interactive Investor

Here’s why these FTSE 250 shares top the performance table

30th May 2023 14:03

by Graeme Evans from interactive investor

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Plenty of companies have struggled in recent years, and there are bargains to be found. Our City writer reports on two lowly rated stocks rallying hard today.

Stock purchase mulling 600

Deal-making activity and a record contract award have propelled two lesser-known mid-cap shares into the spotlight during a session of outperformance for the FTSE 250 index.

Private equity interest in refractory products supplier RHI Magnesita (LSE:RHIM) and an order-driven earnings upgrade by oil well services firm Hunting (LSE:HTG) meant the pair’s valuations surged by double digit percentages at the top of the second-tier index.

The FTSE 250 reached lunchtime 65 points higher at 18,859, whereas London’s top 100 index faded 35 points to 7,592 on uncertainty over how the weekend debt ceiling deal will impact the US economy and the profit potential of many blue-chip stocks earning most of their money overseas.

Other FTSE 250 stocks on the front foot today included transport providers FirstGroup (LSE:FGP) and National Express Group (LSE:NEX), while Pets at Home Group (LSE:PETS) returned to form after last week’s annual results by increasing 14.8p to 372.6p.

There was also a rise of 2p to 662p for UK-focused Edinburgh Investment (LSE:EDIN) Trust after it reported net asset per share growth of 7.9% for the year to March. That compares with 2.9% for the wider FTSE All-Share index. Share price total return was 8.4% over the year.

The company said major drivers of its performance over the year included BAE Systems (LSE:BA.), NatWest Group (LSE:NWG), Centrica (LSE:CNA) and Greggs (LSE:GRG). More recently, it has added to its holdings in UK cyclicals through firms with strong market positions such as easyJet (LSE:EZJ), Dunelm Group (LSE:DNLM) and Travis Perkins (LSE:TPK).

Looking ahead, chair Elisabeth Stheeman said many UK constituents in the portfolio stood at a valuation discount to their international peers.

She added: “Over time, if these companies deliver the operational results that we believe they can, it seems reasonable to expect this valuation differential to close.”

On the fallers board, Dr. Martens (LSE:DOCS) shares fell 8.7p to 152.6p after analysts at RBC downgraded their price target to 180p from 230p previously. The US spending uncertainty also impacted defence technology specialist QinetiQ Group (LSE:QQ.), which retreated 12.6p to 357.8p.

Rebound at Hunting

Hunting shares have fallen sharply this year due to concerns over how lower oil prices and the uncertain economic outlook will make conditions less attractive for energy firms to begin new onshore and offshore projects.

Its operations include the 2011 acquisition Titan, whose perforating guns, energetics and instrumentation tools are used in the shale oil Permian Basin region of West Texas. A separate North America division, which operates mainly from Texas and Louisiana, manufactures products including subsea valves and pressure control equipment.

Today, the company said the largest single order for its drill pipe, casing and tubing division provided more evidence of favourable conditions as governments and countries address energy security, develop domestic supplies or boost their Covid recoveries.

Hunting’s Rajasthan-based contract with Vedanta owned Cairn Oil and Gas is for an estimated 100 wells in a deal worth up to $91 million (£73.1 million).

Based on the timing of the first deliveries of the order, guidance for full-year earnings has been increased to the range of $92-$94 million. Today’s update also described trading conditions in the US as “stable”.

Shares rose 29.5p to 231p but are still a third lower over the year so far.

Other UK-listed oil services companies trade on around 5.5 times earnings, which Zeus Capital said put Hunting on a price of 285p based on its 2024 forecasts.

The City firm added: “Hunting’s level of intellectual property, business position and positive momentum should justify a premium to this level. Using seven times our 2024 forecast would imply a valuation of around 355p, which we think is fully achievable given the ongoing momentum in the business.”

Bid boom continues

RHI Magnesita’s shares jumped by more than a fifth, up 480p to 2,530p, after private equity firm Rhone Capital tabled an offer for a 20% stake at a 39% premium to Friday’s closing price.

About 70% of Vienna-based RHI’s sales are generated from products and solutions supplied to steel customers, with the remainder from other industrial customers in areas including cement, non-ferrous metals and glass.

Analysts at Jefferies said the approach at 2,850p looked an attractive premium at first glance, yet based on an earnings multiple of 6.7 times did not look aggressive.

They highlighted Rhone Capital’s 42% stake in Spain-based pool equipment firm Fluidra, which it reduced to 12% by 2021. Jefferies said: “If we take their holding in Fluidra as an example, it is likely that Rhone Capital will be a supportive shareholder, with appropriate representation on the board, and then reduce this stake over the coming years.”

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.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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