Interactive Investor

Shares round-up: Serco, Rotork, Dunelm

16th February 2021 13:48

Graeme Evans from interactive investor

A rundown of FTSE 250 bargains and recovery plays.

Investors hunting for FTSE 250 index bargains without the roller coaster of the re-opening trade were encouraged to take a closer look at outsourcer Serco (LSE:SRP) and flow control firm Rotork (LSE:ROR) today.

Both stocks got the nod from broker Jefferies. Its team of analysts see further road ahead for Serco shares, despite them rallying 7% to 128.4p on the back of today's major acquisition in US defence services. Jefferies has a price target of 170p, which would be the highest in seven years, after a mixed performance for the stock since hitting a low of 102.5p in March.

The deal for Whitney, Bradley & Brown (WBB), which provides technical services to the US military, will take Serco's North American defence revenues to $1.1 billion (£791 million).

It adds 1,000 US-based employees, 80% of whom have security clearances. There are also about 200 subject matter experts, including many former senior US military officers who are recognised experts in their fields. 

CEO Rupert Soames said Serco now had “credible positions” in several parts of the US defence market and had gained new areas of capability such as advanced data analytics, wargaming and technologies related to geo-location.

Jefferies also noted the significant opportunities for cross-selling and said WBB should add 30 basis points to the underlying margin. Serco, which has been involved in the NHS Test and Trace scheme, ended 2020 in upbeat fashion after forecasting annual revenues up 19% to £3.9 billion and underlying profits set to be 35% higher at above £160 million.

Another stock on the FTSE 250 risers board was Rotork, which jumped 13p to 360p after Jefferies upgraded its recommendation on the flow control and instrumentation business to ‘buy’ and lifted its price target from 350p to 420p.

They said in a note published today: “Rotork is a quality business with a high-quality CEO, who we expect to deliver continued evolution over the next few years”.

The CEO in question, Kevin Hostetler, has overseen considerable investment and restructuring in the first three years of his tenure and now appears ready to capitalise on an improving sales outlook. A net cash balance sheet also gives Bath-based Rotork scope for acquisitions.

Near-term Covid-19 uncertainties persist, but macro headwinds are abating. Jefferies believes the environmental benefits of Rotork's products will increasingly appeal to socially responsible investors.

The shares are trading on a valuation multiple of 20x the broker's 2021 earnings forecast. That is a modest premium against the rest of UK industrials sector but a material discount to FTSE 100 conglomerate Halma (LSE:HLMA) on 31x.

The rest of the FTSE 250 index risers board was dominated by stocks exposed to the re-opening trade, which has been given new momentum by progress on the UK vaccination programme.

Having fallen sharply at the end of last week, tour operator TUI (LSE:TUI) rose 7% 369.4p, Mecca bingo group Rank (LSE:RNK) added 6% to 139.6, Cineworld (LSE:CINE) improved 4% to 86.2p and easyJet (LSE:EZJ) rebounded 24.4p to 840p.

One FTSE 250 stock whose fortunes appear to be firmly on the recovery path is Dunelm (LSE:DNLM), having risen sharply after last week's half-year results showed its digital operation was managing to cover 70% of last year's sales during the current lockdown.

Deputy chairman Will Adderley, the son of founders Bill and Jean Adderley, took the recent strength in the share price as an opportunity to raise £192 million from the sale of a 7.4% stake.

The placing took place at 1,280p, prompting shares to fall 9% or 123p to 1,285p, although the Adderley family still holds a stake of 43.2%. Peel Hunt analyst John Stevenson has a price target of 1,600p, which if achieved would take Dunelm back to the record level seen in October prior to the current wave of store closures.

Dunelm recently resumed dividends with a half-year payment worth £24.3 million and has signalled it hopes to return surplus cash to shareholders.

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