2 FTSE 250 stocks I’d buy in September

These two FTSE 250 (INDEXFTSE:MCX) companies have strategies that could realise considerable value for investors, argues G A Chester.

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I’m always interested in the investment potential of companies engaging in demerger or disposal activities. But especially now, after 10 years of asset-inflating global monetary policy. By contrast, you’ll always get some companies making value-destroying acquisitions by over-paying for assets at what subsequently proves to be the top of the market.

There are currently several FTSE 100 companies that are pursuing a demerger or have the potential to do so. But today, I’m looking at two FTSE 250 firms I think are similarly attractive investment propositions. The first is multinational security services firm G4S (LSE: GFS), and the second is UK and North America transport operator FirstGroup (LSE: FGP).

Unyoking

In its half-year results released earlier this month, G4S reported group revenue growth of 4.7%. It said this growth, together with new contract wins, supports its medium-term revenue goal of 4-6% per annum. Its Secure Solutions division posted growth of 4.9% and its Cash Solutions business grew 3.9%.

Alongside this decent first-half performance, and a positive outlook, the company announced the board has approved the separation of Cash Solutions from the group. It said: “As a result, we have set in train plans for the demerger of Cash Solutions in H1 2020.”

When two businesses are separated like this, we often find that each delivers improved performance, due to a number of benefits, including strategic, commercial and operational focus. In turn, this leads to a higher rating by the market than when the two businesses were yoked together.

G4S is currently valued at nine times this year’s forecast earnings. I think this gives plenty of scope for investors to enjoy a strong uplift in value, as the company pursues its demerger strategy. And with there also being potential for a high-price bid to come in for the Cash Solutions division before the demerger goes ahead, I rate the stock a ‘buy’.

All change

A similar story is unfolding at FirstGroup which, likewise, is currently rated at nine times this year’s forecast earnings. Alongside its annual numbers in May, headed by revenue growth of 5.7%, the company announced a strategy update for its five transport businesses.

It sees a future in which its core market will be North America, centred on First Student and First Transit, its market-leading contract-based businesses. Its iconic Greyhound brand has limited synergies with these businesses, and a formal sale process is now underway.

Change is also in the offing in the UK, where First Bus is one of the largest operators. Here, management is “pursuing structural alternatives to separate our First Bus operations from the group.” Also in the UK, the company has a portfolio of separately-managed rail franchise businesses. It intends to operate them “in accordance with their contractual terms,” but added: “Any future commitments to UK rail will need to have an appropriate balance of potential risks and rewards for our shareholders.”

It may take some time, but I think FirstGroup’s strategy could realise considerable value for investors. As such, I also rate this stock a ‘buy’.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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