Are these six fallen mid-caps now good value?

After a brutal 2022 for mid-cap investors, a City firm identifies six stocks it thinks are now cheap and worth looking at.

A review of heavily-sold mid-caps has named Future (LSE:FUTR), Kier Group (LSE:KIE) and Rank Group (The) (LSE:RNK) among stocks where 2022’s slide in market valuations appears to have gone too far.

Peel Hunt also includes Grafton Group Shs (LSE:GFTU), Impax Asset Management Group (LSE:IPX) and Kenmare Resources (LSE:KMR) after the broker’s analysts picked “six of the best” from this year’s stock market sell-off.

It believes the risks implied by the market on the six firms look excessive on a two-year view.

FTSE 250-listed publisher Future is one such stock after a 50%-plus fall for shares this year on fears over the future of advertising and ecommerce spending.

The slump has left Future trading on 10 times forward earnings, a level not seen since 2016 excluding the pandemic. Peel Hunt said: “In our view, the current price presents a great entry point for a diversified business well placed to weather the storm ahead.”

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Until 2022, the stock had been one of the media sector’s strongest performers after expansion into new verticals and the United States. Even if earnings per share were to fall 22% under a downturn scenario, Peel Hunt notes that Future would still be trading 30% lower than its long-term average at a price/earnings multiple of 13 times.

Shares are currently 1,831p, but the broker’s analyst Jessica Pok sees a recovery to 3,200p.

On Kier, the City firm regards the infrastructure services and construction business is an “incredible buying opportunity” at 71p. It notes the FTSE All-Share company has de-rated by 45% in the last year to 3.7 times 2023 earnings, despite unchanged estimates.

Analyst Andrew Nussey believes the improving quality of earnings and free cash flow remain materially undervalued, leading to a 200p target price. He added “Management is delivering, and we believe just continuing to meet expectations should drive a rerating.

“However, we see potential upside risk to 2024 estimates through organic outperformance, as well as from modest bolt-ons. The likely return to the dividend list 2024 is notable, but the strength of the free cash flow could unlock other accretive actions.”

Rank’s share price was over 300p in early 2020 but the Grosvenor casinos business is now at 85p after the pandemic changed patterns of leisure behaviour as people work from home.

But Peel Hunt says the current share price seems to imply that trading seen in early 2022 when overseas visitors were staying away is the new normal.

A company update in June lowered 2022 guidance, but analyst Ivor Jones is hopeful that next month’s full-year results could restore confidence that casino customers are coming back.

He said: “Further out, there is upside potential from multiple years of investment in the digital business and from a rationalisation of UK land-based casino regulation.” Jones has a target of 175p, having seen Rank’s shares fall 48% this year to trade on 7.6 times 2023 earnings.

Grafton’s inclusion on Peel Hunt’s list was made before today’s trading update, when the Selco and Leyland building supplies firm left full-year operating profit expectations unchanged.

Shares still dropped 25.8p to 738p, having already fallen 50% from their peak to trade on 8.3 times 2023 earnings and a 58% discount to the historic average.

The broker has a 1,200p target price, believing the current valuation paints an overly pessimistic picture and ignores the significant improvements in recent years. 

It notes a net cash position of £580 million equivalent to 38% of the market capitalisation, which gives optionality around both M&A and accelerated capital returns to create value.

Peel Hunt  added: “We believe Grafton remains a quality business, with an excellent track record of value creation, trading at a discount price.” 

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Shares in Kenmare Resources, which operates the Moma titanium mine in Mozambique, were as high as 526p in mid-April due to fears over reduced availability of ilmenite from Ukraine’s mines. Kenmare shares have since fallen 19%, despite a steady uptick in earnings estimates as spot prices of the titanium-iron oxide mineral have marched steadily higher.

Peel Hunt has a target price of 700p compared with 447.5p today.

It estimates the shares are pricing in a 60% fall in prices into 2023, adding that for a mine with a life of over 100 years the valuation and risk/reward balance is appealing.

Shares in Impax Asset Management have fallen by about 55% this year, losing much of the previous growth premium built after a period of exceptional growth in assets.

Peel Hunt believes Impax, which focuses on investment opportunities around the transition to a sustainable economy, should re-establish that premium when conditions improve.

It adds: “A core strength of the business remains the relationships with long-term asset allocators, who are typically more measured in periods of short-term volatility.” The broker has a target price of 1,050p compared with 570p today.