Interactive Investor

Two UK stocks stand out amid fresh sell-off

9th June 2022 15:50

Graeme Evans from interactive investor

It’s another gloomy session in London, but there is the odd bright spot. Our City expert reveals a couple of star stocks and has an update for one of the FTSE 100’s great income generators.

The pacesetters in the FTSE 100 and FTSE 250 were today fuelled by buybacks as GKN owner Melrose Industries (LSE:MRO) took gains for this week to over 20% and MITIE (LSE:MTO) raced to a new 2022 high.

The shareholder boost from their balance sheet tidying came in an otherwise lacklustre session as high oil prices fuelled expectations that interest rates may have to rise faster than expected, leading to another bout of recession jitters.

Selling pressure extended to shares in British American Tobacco (LSE:BATS), even though the income play stuck to guidance for revenue growth of 2%-4% at constant currency in 2022.

Chief executive Jack Bowles told investors he was proud of the progress being made on the company’s three strategic priorities, which include a £5 billion revenue target for new categories such as heated tobacco, vaping and oral products by 2025.

BAT is also focused on generating value from combustibles and building a simpler, faster organisation. The company continues to be highly cash generative and is already in the process of a share buyback programme for this year worth £2 billion.

It’s not alone in doing so in what’s shaping up to be a record year for buybacks as other blue-chips including BP (LSE:BP.) and Diageo (LSE:DGE) use excess cash to reduce their share count.

Aerospace-to-car parts conglomerate Melrose returned £729 million last September but is now committing another £500 million equivalent to 8% of its market cap or 11p a share.

It had intended to announce the plan in March but took the “conservative” decision not to do so because of uncertainty created by the Ukraine war.

This week’s green light came after Melrose completed the last leg of its “Buy, Improve, Sell” strategy on the 2016 acquisition of the Nortek air management-to-home automation business.

Monday’s deal to sell the US-based standing desk business Ergotron later this summer will seal the Nortek exit and raise £520 million, roughly equivalent to the buyback sum.

Shares started the week at 133.4p but now stand at 164.15p, including a rise of 6.45p today as investors also welcomed updated targets for the GKN aerospace division after management hosted a capital markets day yesterday.

Analysts at RBC Capital Markets said the guidance pointed to a 30% uplift for the current 2025 consensus forecast for aerospace earnings and 10% for the wider group.

They have a price target of 220p, while counterparts at JP Morgan are at 215p. They said the balance sheet remains under-levered and that there is potential for further shareholder returns should market conditions allow.

In the FTSE 250, the facilities management firm Mitie joined the buyback club by launching a £50 million return of excess cash. The announcement came alongside annual results showing revenue growth of 58%, or 14% when excluding the impact of its Interserve acquisition and short-term Covid-related contracts.

The underlying margin for continuing operations improved from 2.3% in 2021 to 4.2% as Mitie recorded an underlying profit of £147 million and earnings per share of 9.2p.

Shares jumped 5.6p to 67.2p, their highest level this year, as chief executive Phil Bentley also declared a bigger-than-expected full-year dividend of 1.4p a share for payment on 5 August, worth a total of £19.5 million.

He said: “Through our investment-led strategy, Mitie has reached an inflection point earlier than anticipated.” Bentley promised the group would now look to focus on “long-term value creation, accelerating investment in growth and delivering enhanced shareholder returns”.

Peel Hunt estimates the buyback will enhance the company’s earnings per share figure by 5. Following its forecast changes, the broker points out that the shares are trading at a 36% discount to Mitie’s wider international peer group.

The broker has a price target of 92p, based on the reduced execution risk on the Interserve acquisition and expectation for continued strong cash generation. Liberum has a 90p target.

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