Interactive Investor

Two mid-cap shares in a dramatic rebound

25th May 2022 15:36

Graeme Evans from interactive investor

Upgraded guidance by both these firms has got the City excited and the share prices rising sharply.

Upgrades to guidance by Softcat (LSE:SCT) and Volution Group (LSE:FAN) bucked the economic gloom today as their previously high-flying shares returned to form in the FTSE 250 index.

Building ventilation business Volution was among the second tier’s top 10 best performing stocks in 2021, but has hit tougher times after losing about a third of its value in 2022.

However, the stock rallied 22p to 377.5p today as an unscheduled trading update forecast earnings towards the top end of City expectations. It has been buoyed by third quarter revenues growth of 8.8% following strong demand in the UK residential market.

It said: “Our order books and activity levels, coupled with the regulatory and customer focus on improving energy efficiency in buildings, should continue to support demand.”

Volution also reported a disciplined approach to managing price pressures, including through accelerated progress on its adoption and use of recycled plastics.

Liberum raised its 2022 and 2023 earnings estimates by 4% today and said the shares should trade at a wider premium to the UK building materials sector given the company’s proven ability to pass on cost increases quickly.

The broker sees a potential 40% upside to its target price of 500p, an estimate it reduced from 560p today in order to reflect lower European peer multiples.

The company’s shares hit 557p for a valuation above £1 billion at the end of last year as the pandemic boosted awareness of the importance of indoor air quality. A strong housing market and demand for low carbon and silent solutions in home refurbishments also helped.

Volution, which trades under brands including Manrose and Airtech, generates around half of its revenues from the UK, with the rest from Europe and the Australasia markets.

At Softcat, a brief update showed that the IT infrastructure services business is on track to deliver operating profit for the full year slightly ahead of previous expectations.

This followed double-digit improvements in revenues, gross profit and operating profit for the third quarter to the end of April, extending its run of growth to 67 consecutive quarters.

Marlow-based Softcat said the performance was broad-based across all technology segments, amid “strong and stable” customer demand”. It added that supply chain issues have continued but are no more challenging than in the first half.

Even though the company raised guidance at its recent half-year results, the shares have fallen from September’s high of 2,200p to 1,266p earlier this month. This partly reflected City fears that higher wage inflation might leave profits growth in single digit territory.

The stock rallied 57p to 1,405p on the back of today’s update as analysts at Numis Securities upgraded their full-year earnings forecast by 3% and by 12% so far this year.

The broker moved to a “buy” recommendation with an unchanged price target of 1,802p, adding: “With its scale, diversified exposure and enviable track record, Softcat offers a good way for investors to gain exposure to the structural growth in technology.”

Counterparts at Bernstein added: “This update supports our thesis that demand for digital transformation and the requirement for IT infrastructure will not slow even in a more muted economic environment.”

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