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Open season for UK mid-caps

Published 20/06/2024, 13:11
Open season for UK mid-caps

Proactive Investors - The anticipated exit of Alpha FMC from the public markets, following its £626 million agreed deal with private equity firm Bridgepoint, underscores a broader trend: Britain’s mid-cap companies are being snapped up at what can only be described as bargain-basement prices.

In recent months, we’ve seen a flurry of activity mid-cap sector. Telecoms testing company Spirent Communications (LON:SPT), logistics group Wincanton, and Keywords Studios, a service provider to the video game industry, have either succumbed to takeover bids or are currently under serious acquisition consideration.

For buyers, this market represents a golden opportunity. The forward price-earnings (P/E) ratios, a fundamental metric for assessing stock value, stand at an appealing 11 times earnings — a significant 20% discount from the historical average of 14 times earnings.

Additionally, the dividend yield on UK mid-caps is at 4%, about 25% higher than its historical average of 3.2%. These figures indicate either an abundance of cash among these companies or depressed share prices that enhance effective payouts — or perhaps both.

The brake on mid-cap share prices, driven by economic growth concerns, masks the inherent resilience of these businesses.

Despite economic uncertainties, corporate profitability has remained robust. With expectations of falling interest rates and a return to growth on the horizon, the timing looks ideal for the more opportunistic elements to capitalise on these undervalued companies.

However, the appetite for UK-listed small and medium-sized businesses has been waning.

According to a recent FT article, funds investing in UK companies have experienced 34 consecutive months of outflows.

This persistent withdrawal of capital has driven down valuations and led many company managers to question the benefits of remaining publicly listed, thereby depleting the UK's stock of mid-cap quoted companies.

The undervaluation of these firms offers an attractive entry point for savvy buyers, particularly private equity firms and overseas buyers, who can leverage lower valuations to secure strong assets at a discount.

As the market recalibrates and investors begin to recognise the latent value in these mid-caps, those who moved early will likely reap significant rewards.

Read more on Proactive Investors UK


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