FTSE 250 chemicals group Synthomer (LSE: SYNT) has doubled in value since the start of 2015. The group released its 2016 results on Monday. Underlying sales rose by 20.2% to £1,045.7m, while pre-tax profit rose by 28.2% to £122.2m.
Synthomer’s results were given a boost last year by the weaker pound. But the firm’s performance was impressive without this. Volumes rose by 9%, and underlying pre-tax profit at constant exchange rates rose by 16.4%.
The firm has announced a modest-sized acquisition today which should provide a further boost to earnings. In this article I’ll consider the case for buying Synthomer and look at another mid-cap growth opportunity.
This stock could outperform again
Synthomer makes specialist chemicals used in a wide range of manufacturing applications. This diversity helps to insulate the group from the sector-specific problems we’ve seen at companies that depend on the oil industry, for example.
Net debt of £150.3m is very low relative to the group’s profits. Shareholders benefit from strong cash generation. The dividend was increased by 31.6% to 11.3p per share last year. I estimate this payment should be covered comfortably by free cash flow.
As you’d expect from a high-quality growth stock, Synthomer shares aren’t cheap. They currently trade on a 2017 forecast P/E of 16.5, with a prospective yield of 2.4%. But it’s worth remembering that earnings forecasts for this firm were increased nearly every month in 2016.
If Synthomer continues to outperform expectations in 2017, the firm’s current share price could look cheap by the end of the year. I’d be happy to buy this stock at current levels.
The pick of the bunch?
Home and motor insurance group Hastings Group (LSE: HSTG) only floated on the London market in October 2015, but it’s already made a strong impression. The firm’s shares have risen by 40% so far, but the stock doesn’t look expensive to me.
The total value of premiums written last year rose by 25% to £768.0m. Market share for private car insurance increased from 5.8% to 6.5%. Adjusted operating profit would have risen by 21% to £152.1m, if it wasn’t for a £20m one-off charge following the so-called Ogden rate change.
This legal change will mean that Hastings (like all insurers) has to pay out more in compensation payments to allow for lower interest rates. But the firm doesn’t expect the change to have a material impact on 2017 profits, as insurance rates will be adjusted to reflect the higher costs. Nor should this change result in an increase in borrowing — Hastings’ multiple of net debt-to-adjusted operating profit fell from 2.1 times to 1.9 times last year, despite the impact of the Ogden change.
Hastings earnings per share are expected to rise by a 65% to 19.6p this year. This puts the stock on a forecast P/E of 12, with a prospective yield of 4.8%. In my view this is an undemanding valuation, given that the group’s strong record of growth.
I’d be happy to add Hastings to my portfolio at current levels for both income and growth.
