It’s not all bad news for UK companies as these three star stocks demonstrate.
The uncertainty facing the UK-focused FTSE 250 index was put to one side today when two high-flying stocks posted spectacular gains and a third offered fresh recovery signs.
Speciality chemicals firm Synthomer (LSE:SYNT) reached its highest level this year after shares rose another 16%, while fast-growing IT services business Kainos (LSE:KNOS) surged 27% to a new record as an unscheduled trading update revealed it was trading well ahead of expectations.
Emerging market investment manager Ashmore (LSE:ASHM) also added 7% to its highest level in more than a month as the dividend stalwart reported an improved quarterly trend for fund flows.
The performances by the trio of mid-ranking second-tier stocks offered much-needed cheer for investors after a few days in which the FTSE 250 index has traded sideways on the back of Brexit uncertainty and the threat of more severe coronavirus restrictions in the UK.
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Kainos appears to have benefited from the pandemic accelerating demand for digital transformation services, with the UK government and the NHS among its clients.
We first flagged the company's potential a few months after the 139p-a-share debut in 2015 — a listing that made millionaires out of staff who had been with Kainos from the outset in 1986. Kainos is one of the longest standing independent technology companies in the UK, having been set up as a joint venture between ICL (now Fujitsu) and Queen’s University Belfast.
Shares were trading at 1,300p today after its trading update indicated that Kainos will materially beat current consensus forecasts of 7% revenues growth and significantly better expectations for profits in the year to the end of March.
Today's update led analysts at Canaccord Genuity to hike their forecasts for earnings per share by another 35%, meaning the figure is almost 80% higher than at the start of the pandemic. Out of the 11 listed IT services companies on Canaccord's watch, Kainos is the fastest growing.
The broker believes there's plenty more to go for, with tenders for NHS Digital work and continued high demand for Workday software services. A new price target of 1,500p values the shares at 35 times calendar earnings, but Canaccord said there is scope for the multiple to go higher “as the scarcity value of such resilient growth attracts ever higher valuations”.
Strong momentum is also being seen at Synthomer, which supplies the chemicals used in textiles, paint and latex gloves. The company should be well known to ii clients after a resilient performance in our 2019 Winter Portfolio, when it ended the period with a 1.6% profit to extend a decade-long record of strong winter trading.
Synthomer now expects underlying earnings for 2020 to be around £232 million, which is 10% higher than envisaged in August after all three divisions performed ahead of last year.
Dividend payments are to resume, with the board planning to pay April's deferred 3p a share on 10 November and restore the existing dividend policy. Numis Securities increased its full-year dividend forecast by 12% to 9.7p a share, implying a dividend yield of 2.9% for the current year.
After overcoming Covid-19 demand disruption, Numis said that an 18% valuation discount to Synthomer's peers is unwarranted given the current momentum. The broker increased its price target from 350p to 420p and raised its recommendation from ‘add’ to ‘buy’.
Another decent dividend yield is on offer at Ashmore, which encouraged investors today by reporting that total assets under management rose 2.3% between June and the end of September to US$85.5 billion. This reflects positive market movements and investment performance, offset by a smaller-than-expected outflow of $800 million.
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Shares fell 12% over the quarter, meaning that Ashmore has been trading on a 2021 earnings multiple of less than 10x and yielding 4.6% based on the historic level of dividends. They were at 386p today after Peel Hunt kept a ‘buy’ recommendation and price target of 450p.
The broker said: “The investment case for Ashmore today is as strong as ever — there is still significant potential to outperform in the coming years, and Ashmore remains well positioned to benefit when allocations increase.” Shore Capital added that value was re-emerging, supported by one of the safest dividends in the sector.
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