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[hhmc]
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”.