A sustainable 7.5% dividend yield and an oversold housebuilder

We've seen some big moves among UK mid-caps Wednesday, which has opened up some opportunities for investors, reports Graeme Evans. 

Mid-cap stocks dominated the reporting arena today, with Page Group's storming quarter of growth and the robust performance of high-yielding pub chain Marston's drawing particular attention.

There were also significant updates from the under-pressure car retail and housebuilding sectors, with shares in Vertu Motors and Telford Homes both struggling in the wake of their latest figures.

Page's performance was particularly impressive, with third-quarter net fee growth of just under 20% being its best result since 2011. It was helped by further strong trading in Asia Pacific, as well as a welcome return to growth for its Brexit-hit UK division.

With group operating profits for 2018 now running marginally ahead of forecasts, there was plenty of support in the City even if Page shares failed to hold on to their initial 2% rise.

Analysts at HSBC nudged up their price target to 700p, which exceeds the 609p record high set in August. They apply a price/earnings (PE) multiple of 19x to the shares, pointing out this is still a 16% discount to average mid-cycle multiples.

They added:

"Page Group operates at a higher wage rate band than the generalist staffers. If there is wage inflation, we believe Page is the most likely beneficiary."

Time to buy a high-yield boozer?

The 7.5% dividend yield at Marston's was back in the spotlight today after the pub company's year-end update showed operating profits will grow to £104 million. Higher interest charges and the impact of weather on food-led Destination pubs meant this was slightly below many City hopes.

But there was encouragement from trading elsewhere, with sunshine and World Cup football helping to boost the results in brewing and the Taverns division.

The conclusion from both Peel Hunt and JP Morgan Cazenove was that the dividend looked to be sustainable, leading to their price targets of 125p.

Source: TradingView        Past performance is not a guide to future performance

Langton Capital thinks the final dividend will be increased by 0.1% for both 2018 and next year. Marston's shares trade on a lowly PE multiple of just over 7x.

Langton added:

"The shares appear cheap as the group, which has an attractive, well-managed and well-maintained estate of largely freehold properties, is selling product that the consumer would like to buy at a price they are prepared to pay."

Housing sector gloom

The current Brexit uncertainty affecting the housing market was reflected in the latest update from Telford Homes, whose shares slid 7% today to 365p.

While the London-focused residential property developer has seen steady demand in its core market of homes priced under £600,000, sales above this mark have been taking longer to secure. In order to achieve its target of exceeding £50 million of profit for the year to 31 March, Telford has just under 90 homes left to sell, with around 25 of these priced over £600,000.

Its Build to Rent strategy is offsetting some of the pressure, but analysts at Canaccord Genuity think shares will continue to struggle in the near term given the current trends and macro/political uncertainty.

The shares trade on a price to net asset value multiple of 1.15x for FY19, with a dividend yield of 4.8%. Canaccord has a price target of 500p and said the valuation did not look stretched after a 6% fall in the year to date. Peel Hunt is at 510p.

Source: TradingView (one-week chart)      Past performance is not a guide to future performance

Car retailer Vertu Motors is also operating in a challenging marketplace, with shares down 4% today after a 13.4% drop in half-year profits to £18.1 million. Like-for-like sales still rose 7.4% thanks to the long-term growth trends in aftersales and decent growth in used car volumes. 

While near-term trading conditions are challenging, analysts at Zeus Capital still see "significant long-term value" in the company and believe Vertu is well positioned to cope with the headwinds caused by supply side issues in the new car market.

They value the stock at 74.2p, with Vertu on a projected 2019 PE of 9.1x, falling to 7.6x in 2020. There's also the potential for further share buybacks, having recently spent £2.5 million on 5.6 million shares at an average price of 43.6p.