Two mid-caps on the recovery trail

Having been cast aside by investors at the start of this year, Britvic (BVIC) and Babcock International (BAB) kick-started their respective fightbacks today with better-than-expected financial figures.

Both have caught the eye of short-sellers in recent months, with Babcock in the shadow of the Carillion collapse and Britvic impacted by various factors ranging from sugar tax fears through to worries about one-off charges.

The FTSE 250 (MCX) Index pair now appear to be out the other side, if today’s results are anything to go by. MoD support services firm Babcock rose 2% to its highest level since November, while shares in Britvic jumped by 7% to within sight of the 820p record high achieved at the start of this year.

The Robinsons, Fruit Shoot and Pepsi MAX firm posted half-year figures well ahead of market expectations, with revenues up 4.5% to £733.2 million and underlying earnings ahead 9.4% to £80.5 million.

Britvic was helped by the success of zero-sugar product Pepsi MAX, which has performed strongly in a competitive market. The low-calorie product, which Britvic produces and sells under an exclusive agreement with Pepsi Co, is a significant part of the company’s response to the UK levy on sugary soft drinks.

The key summer selling season is still to come, but Citi said today’s results were “clear evidence of improving trading momentum”.

Source: interactive investor      Past performance is not a guide to future performance

Helped by a 4% dividend yield, and with risks to earnings skewing to the upside and the stock trading at a discount to the long-run average, Citi has a buy recommendation and target price of 870p.

The stock slumped in January after a mixed winter trading performance was accompanied by a one-off hit worth up to £40 million from the proposed closure of its factory in Norwich in 2019. Britvic also highlighted a number of costs in relation to the collapse of wholesaler Palmer & Harvey.

Analysts at Mirabaud Securities described the share price plunge following that Q1 update as inexplicable and said Britvic remains a “deeply unloved” company compared to key peers.

They added today: “The track record of delivery, earnings growth, and value creation all still receive precious little credit from the market.” The broker has a target price of 970p.

At Babcock, chief executive Archie Bethel highlighted a strengthening balance sheet following a year in which the company defied political and economic uncertainty to post record underlying revenues and profits.

Net debt reduced 5% to £1.1 billion in the year to March 31, while Babcock increased its dividend for the 17th consecutive year – up 4.8% to 29.5p.

He added that the order book and bid pipeline worth a combined £31 billion supported future growth prospects, despite the City’s ongoing worries about public sector and MoD budgets.

Source: interactive investor          Past performance is not a guide to future performance

The company provides technology, infrastructure management and specialist training across sectors including marine, aviation and nuclear.

Jefferies said the annual results contained many positives, none more so than free cash flow (FCF) coming in 30% higher than expectations.

The broker, which has a 950p price target, added: “In a sector driven by FCF yield, this should sustain Babcock’s recent share price rally.

“The bid pipeline increase also provides comfort regarding revenue outlook during a period of debate regarding UK public sector and MoD budgets.”

With a price target of 1100p, Liberum said Babcock was one of its key “buys”. It pointed out today that a projected 2019 PE multiple of 8.6x was at a 40% discount to the sector average of 13.5x.

They added: “Babcock remains cheap, despite our view that the reasons for caution are beginning to abate.”

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