Investors searching for cyclical recovery plays should “look no further” than some of the UK heavy industrials sub-sector, according to analysts at Berenberg.
The bank issued a note presenting five ‘buy’ ideas, offering “attractive” valuations, strong balance sheets and half-year results that were mostly better than expected.
Hill & Smith Holdings PLC (LON:HILS) is the preferred stock, followed by Bodycote PLC (LON:BOY), which was upgraded from ‘hold’, Vesuvius Plc (LON:VSVS), RHI Magnesita NV (LON:RHIM) and Morgan Advanced Materials plc (LON:MGAM).
“While risks clearly remain elevated and these companies are more vulnerable to a potential second lockdown, recent data and company commentary point to a gradual recovery in most key end-markets.”
As a result, the analysts see these as “compelling opportunities” in an industrials sector where valuations remain hugely polarised between ‘defensives’ and ‘cyclicals’.
Following early signs of improvement across most relevant end-markets, the Berenberg number crunchers said while they are cautious about forecasting a material pick-up in the second half, with destocking trends across several markets seen as likely to persist in the third quarter, they expect a stronger fourth quarter and a “much improved” run rate heading into 2021.
“With most of these companies market leaders in highly fragmented industries, there is the potential to win market share or execute bolt-on M&A during this period.”
10 strategic winners
Elsewhere, Berenberg's equity strategy team picked out 10 more mid-cap companies have prospered amid the exceptionally tough conditions this year.
Half of these are exposed to new energy sources, video games, healthcare or certain industrial end-markets and while their shares have risen to a level where they look expensive on conventional multiples, “but the medium-term opportunity remains impressive and we continue to support the investment case”.
Highlighted in this case were Ceres Power (LON:CWR), Frontier Developments (LON:FDEV), Team17 (LON:TM17), XP Power (LON:XPP) and YouGov (LON:YOU).
Alongside that handful, another group was noted for their “particularly strong operating performance” but their notably cheaper valuations as for one reason or another, have not seen the same share price performance strength as those above.
This group is made up of JTC (LON:JTC), UDG Healthcare (LON:UDG), Computacenter (LON:CCC), Future (LON:FUT) and Marlowe (LON:MRL).