Interactive Investor

Profits boost for these mid-cap shares

21st July 2022 16:13

Graeme Evans from interactive investor

It’s not just the big boys that can grab headlines with sizeable increases in profit. A bunch of FTSE 250 stocks are in on the act too.

A big outperformance by the FTSE 250 index was today led by (LSE:MONY) and Frasers Group (LSE:FRAS) as mid-cap investors got a confidence boost at the start of earnings season.

Alongside double-digit percentage gains for shares in the consumer-focused pair, there were strong performances by Dunelm (LSE:DNLM) and ventilation business Volution (LSE:FAN) as their updates offered encouragement that trading has been more robust than expected.

The FTSE 250 index jumped 263 points to 19,663, which is the highest level since mid-June and represents a rise of more than 6% in the past week. It contrasts with today’s sideways performances by the FTSE 100 index and the FTSE All-Share.

Frasers Group accelerated 191.5p to a record high of 941.5p after profits for the year to April came in towards the top end of its previous guidance at £345 million. This followed revenue growth of 30.9%, a 150-basis points margin improvement and major cost efficiencies.

Despite the more challenging backdrop, Frasers thinks current momentum puts it on course for profits of between £450 million and £500 million in the current financial year.

Liberum analyst Wayne Brown said it had been a standout year for the retailer as the Sports Direct owner benefits from its strong brand relationships.

He lifted his price target to 1,000p from 900p prior to this morning’s share price surge. Brown added: “With such strong momentum, strength of cash generation, and very likely further M&A, it is anomalous that the shares are trading on a single-digit price/earnings ratio.”

The Moneysupermarket improvement of 24.3p took the shares to their highest level since January at 216.4p, reflecting the impact of better-than-expected half-year results and the company’s increased optimism over the full-year outcome.

As well as a strong rebound in travel, the price comparison platform has seen “exceptional” trading for its Money vertical after consumer interest was stimulated by the launch of some attractive banking products.

Adjusted earnings lifted 10% to £56.6 million, even though the energy switching market is effectively closed and the car and home insurance markets are yet to reach a “steady state” following the Financial Conduct Authority’s new pricing regulations.

The company backed up its confidence by declaring an unchanged interim dividend of 3.1p a share for payment on 2 September. The shares, which trade with a forward dividend yield above 6%, are rated a “buy” by Numis Securities with a 320p target.

Dunelm shares were 37.5p higher at 863.5p, which compares with 1,434p in January, after the homewares business said profits for the year to 25 June will be slightly ahead of analyst consensus of £207 million after a stronger-than-expected final quarter.

Broker Peel Hunt, which has a price target of 1,375p, said: “There is no sense that momentum is faltering as the group continues to take market share.”

An end-of-year update also revived interest in Volution shares after a 2022 performance in which the stock has de-rated 30% despite no change to forecasts.

The group, which designs and makes energy efficient indoor air quality products, said revenues are on course to be £308 million in the year to 31 July for growth of around 13%. Its operating margin has stayed at 21% thanks to “decisive” pricing initiatives.

Chief executive Ronnie George said geographic diversity, Volution’s varied end markets and increasing regulatory drivers boosted his confidence in making further progress this year.

Analysts at Jefferies believe shares have the potential to revisit the 480p seen earlier this year, while Peel Hunt has a target price of 510p.

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