Two UK shares with recovery potential

Two stocks with recovery potential today led the FTSE All-Share as Treatt (LSE:TET) revealed strong China growth and Auction Technology Group (LSE:ATG) hailed its “significantly improved momentum”.

Following last year’s industry de-stocking, Treatt shares rebounded by 40.5p to 467.5p as the supplier of natural extracts and ingredients for the drinks, flavour and fragrance industries posted a robust year-end update.

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This included 16% second-half sales growth, led by improved trading in its Heritage segment spanning citrus, synthetic aromas and herb spices and florals.

It also flagged sales momentum in China, where a new Shanghai innovation facility is set to increase its ability to tailor products to local tastes in conjunction with regional customers.

The shares have more than halved in the past two years but house broker Peel Hunt believes that the material valuation gap to peers such as Givaudan SA (SIX:GIVN), Symrise AG (XETRA:SY1) and DSM Firmenich AG (EURONEXT:DSFIR) should narrow as confidence in the outlook improves.

It added: “Treatt is very well invested, with considerable spare capacity, and in our view has strategic value. We believe the rating could increase materially as confidence grows regarding mid-term potential.”

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The broker reiterated its support for a rebound in shares to 800p, while Investec Securities has a price target of 880p.

It said: “The second half of 2023 was adversely affected by industry de-stocking, but Treatt is winning new business and showing a sharp acceleration in growth in China.”

Treatt remains on track to meet 2024 profit expectations of £18.8 million, an increase of 9% on last year despite an FX headwind of close to £1 million due to the weaker US dollar.

Strong cash generation meant Treatt ended the financial year with net debt of £700,000, some £3.5 million better than Investec’s forecast and down sharply on £10.4 million the year before.

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Auction Technology Group joined the stock market in 2021 at 600p and topped 1,500p at one point before higher interest rates caused a rotation from the sector and impacted activity levels. Tougher trading conditions included at Proxibid, North America’s largest online marketplace which lists items from agricultural machinery to classic cars.

ATG powers eight online marketplaces and listing sites, hosting in excess of 85,000 live and timed auctions each year in the industrial and commercial and art and antiques sectors. Its other leading brands include The Saleroom and BidSpotter.

Shares were as low as 369p last month but have since recovered to 448.1p after today’s rise of 36.1p on the company’s “significantly improved momentum” in gross merchandise value in the second half of the financial year.

ATG said the adoption of value-added services helped to offset ongoing headwinds in end markets as it forecast a 5% increase in annual revenues to $174 million (£133.2 million). Progress on costs has also led to a significantly improved adjusted margin in the second half.

The revenue figure is slightly short of the City consensus but JP Morgan Chase said it viewed the result as much better than feared from a sceptical investor base. The bank recently upgraded the stock to Overweight on the basis of risk/reward inflection, believing the shares are overly discounting earnings risk into 2025.

It said it saw today’s update as “a reassuring check-point to that narrative” as the bank reiterated a price target of 530p.