Interactive Investor

Two FTSE 250 stocks leading the mid-cap rally

1st December 2021 13:35

Graeme Evans from interactive investor

It’s been a great fightback by the mid-cap index as investors shrug off concerns about the Omicron variant to pick up bargains.

A 1.5% rebound for the FTSE 250 index was more than just a story about easyJet (LSE:EZJ) and Cineworld (LSE:CINE) today after star turns by two of its lesser lights, Drax (LSE:DRX) and Redde Northgate (LSE:REDD).

Their shares surged 12% and 10% respectively during a robust session for mid-cap stocks, as investors regained their appetite for risk following the heavy Omicron-driven selling seen since Thursday.

Low-cost airlines easyJet and Wizz Air (LSE:WIZZ)rebounded 5% and Cineworld cheered 7%, but the top of the risers board was reserved for Drax and Redde Northgate after their strong updates.

The North Yorkshire-based biomass energy business Drax, which has a market value of £2.1 billion, surged as it said full-year earnings will be at the top end of City forecasts.

Drax boss Will Gardiner also set out new targets aiming to double the company's sustainable biomass production capacity by 2030. He expects momentum will come from Asia and Europe, where demand for biomass is increasing as countries transition away from coal.

Drax is the UK’s largest source of renewable electricity through biomass, hydro-electric and pumped hydro storage assets at four sites in England and Scotland.

It also operates a bioenergy supply business with manufacturing facilities at 13 sites in the US and Canada, producing compressed wood pellets for the company's own use and for customers in Europe and Asia.

Drax is now targeting 12 million tonnes of carbon removals each year by 2030 through bioenergy with carbon capture and storage (BECCS). This ambition includes the negative emissions from the Drax power station at Selby and new-build BECCS projects in North America and Europe as part of its support for a growing sector of the economy.

Investors liked what they heard from Gardiner as he also stuck by the company's capital allocation policy, which has delivered average dividend growth of 10% in the last five years.

Shares jumped 56.5p to 606.5p, the first time they have been above 600p since 2014.

Redde Northgate shares surged 48p to 443p after it reported a bigger-than-expected 94% jump in underlying profits to £78.9 million for the six months to 31 October.

The business was created in February 2020 through a merger between van rental business Northgate and Redde, which provides incident and accident management, legal and other mobility-related services.

New vehicle supply constraints have boosted demand for the company's rental fleet, while the growth of ‘last mile’ delivery services associated with internet shopping have also helped.

Hire revenue in the Northgate UK and Ireland business increased 16.2% to £170.8 million, based on a fleet of 55,900 vehicles at the end of the period.

The surge in used vehicle prices more than offset a big reduction in the number of vehicles sold, leading to a 126% improvement in the average profit per unit on disposal.

Revenues for Redde increased 39% to £251.9 million after an increase in traffic volumes and accidents since April to approximately 90% of pre-Covid levels.

Significant new multi-year contract wins in the period included with Tesco (LSE:TSCO), Admiral (LSE:ADM) and another major insurer with lifetime contract revenues in excess of £200 million.

Amid confidence in its outlook, the group declared an interim dividend of 6p to be paid on 14 January, which compared with 3.4p the year before and amounts to 50% of the full-year dividend for 2021.

Analysts at Singer Capital upgraded their full-year profit forecasts by 10% and said they saw potential for further improvement as the year progresses, supported by strong rental demand, high residual values and continued strength in vehicle traffic volumes.

The broker has a price target of 535p. Counterparts at Barclays upped their target price to 516p, while Stifel is now at 502p.

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