Interactive Investor

Why investors love these two mid-cap shares

1st June 2021 14:19

Graeme Evans from interactive investor

One mid-cap is in a sweet spot while the other has exceeded expectations. Here’s the story.

Tailwinds behind newly-listed DIY chain Wickes (LSE:WIX) and a faster-than-expected recovery at waste collection firm Biffa (LSE:BIFF) gave their shares a significant boost in the FTSE 250 index today.

A surprise trading update from Wickes, showing like-for-like sales ahead 23.1% on the same period two years ago, sent shares 6% higher, while Biffa lifted 5% after better-than-expected full-year results improved its turnaround hopes following a challenging year.

At Wickes, the robust demand from DIYers and tradespeople means its shares are back at the 270p price seen on the day of its demerger from Travis Perkins (LSE:TPK) in late April.

Analysts at Liberum upgraded their forecast for 2021 profits by 22.8% to £68 million, adding that the group looked to have entered into a cycle of upgrades. They said: “Wickes is in a structural sweet spot where numerous tailwinds should drive multi-year growth ahead of the broader market.”

The broker increased its target price by 60p to 420p, while counterparts at Peel Hunt increased their estimate to 320p after nudging up full-year profit forecasts to £67 million.

Wickes also reassured investors that it is working closely with suppliers to manage its way through availability constraints and the inflationary pressures seen across raw materials.

The business was valued at £680 million when it split from Travis, with the demerger move designed to enable both companies to focus on growing their respective core operations.

Biffa bashes expectations

Meanwhile, Biffa chief executive Michael Topham said the past year has been one “none of us want to repeat” but added that it had also shown the company in its best light after essential services were protected and the company's margins held up well.

This was reflected in underlying earnings coming in slightly better than City expectations at £44.2 million for the year to 26 March, down from £90.5 million the year before.

Volumes in the business collections division dropped by as much as 50% at the height of the pandemic, although the full-year figure eventually recovered to 82% below the previous year.

The bottom-line loss per share of 13.7p included one-off items such as an £8 million write down at an anaerobic digestion plant in Staffordshire where leftover food is recycled into gas. It saw lower volumes of waste due to the shutdown of the hospitality industry, while Biffa also took a £14 million hit from an IT replacement project.

Topham said the company was “strongly positioned” for the post-pandemic recovery, with prospects further lifted by last month's deal to buy Viridor's industrial and commercial collections business and certain recycling assets.

His optimism helped send shares up as much as 10% before later settling 5% or 15.5p higher at 308p. Biffa joined the market in October 2016 and secured FTSE 250 promotion in March 2020.

Analysts at Numis Securities reiterated their target price of 355p after upgrading their earnings per share forecasts for the next two years by between 9% and 17%.

They said that a 2023 price/earnings multiple of 13 times was “attractive in the context of the long-term opportunity available”, adding that there was potential for forecast upside if recent trading trends persist.” Exane analysts also have a target price of 340p.

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