Top 10 UK share tips with compelling valuations

A major overhaul of this analyst's list of 10 best Buy-rated UK small and midcap stocks includes seven changes. City writer Graeme Evans names them here.

16th October 2024 14:05

Graeme Evans from interactive investor

A top 10 selection of Buy-rated UK stocks has been given a major overhaul following the inclusion of Barratt Redrow (LSE:BTRW), Direct Line Insurance Group (LSE:DLG), easyJet (LSE:EZJ) and Dunelm Group (LSE:DNLM).

Whitbread (LSE:WTB), Moonpig Group Ordinary Shares (LSE:MOON) and IG Group Holdings (LSE:IGG) are the other newcomers as part of seven changes made to the midcap focused compilation of analysts at City bank UBS.

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October’s review follows a strong run as Rightmove (LSE:RMV), Keywords Studios (LSE:KWS) and Trustpilot Group (LSE:TRST) led to growth of 12% in the period since the portfolio was established earlier this year.

Rightmove and Trustpilot retain their places alongside Just Eat Takeaway.com NV (LSE:JET) as UBS selects its 10 best Buy-rated ideas from its 95-strong small and midcap UK coverage.

The updated list offers a potential average 40% upside based on UBS’s latest target prices, led by more than 50% for Just Eat, easyJet and Moonpig.

The bank seeks to include names with an attractive investment case, compelling valuations and, ideally, with a near to mid-term catalyst.

The largest stock is the £6.8 billion valued Barratt Redrow, which is the biggest housebuilder in the UK by revenue following the all-share acquisition of Redrow.

UBS values the shares at 630p, which compares with 485.4p today. It said: “We expect a significant recovery in earnings in the coming years as the UK housing market recovers, aided by planning reform and reducing interest rates.

“We think there is also a self-help opportunity as Barratt integrates Redrow, extracts synergies and gets scale advantages in the coming years.”

The inclusion of easyJet comes with a projected upside for shares to 800p as UBS regards the low cost-airline as an attractive way to play the industry’s traffic volume recovery.

It adds that the current share price implies average fares falling by about 9%, versus the bank’s own expectations for growth of about 1%.

The swifter upside potential means easyJet takes the top 10 place of Jet2 Ordinary Shares (LSE:JET2), although the package holidays firm continues to be Buy rated.

Direct Line is another new pick based on the Churchill, Privilege and Green Flag insurer’s “attractive” turnaround story and longer-term potential for excess capital returns. The base case for shares is 245p, up from today’s 172.8p.

UBS believes the structurally competitive positioning of Dunelm Group (LSE:DNLM) supports profitable market share growth in a recovering UK homewares market, leading to a price target of 1,410p.

On trading platform IG, the bank anticipates stronger structural growth with both cyclical and diversification benefits coming through in the near-to-midterm. The price target is 1,150p.

The inclusion of Moonpig comes on the day that the online greetings card firm revealed its new capital allocation policy that features plans for a £10 million dividend distribution in 2025.

UBS, which had a price estimate of 350p ahead of the update, likes the group’s dominant position within a double-digit growth market. It also highlights adjusted margins consistently above 20% with a strong and improving cash conversion profile.

As Whitbread posted half-year results, UBS forecast an upside to 4,400p based on future capital returns, a turnaround of German operations and the impact of restaurant restructuring.

Just Eat Takeaway is seen reaching 1,715p as it is a dominant player within a recovering market. UBS thinks it will benefit from expanding margins driven by delivery logistics efficiencies, while improving free cash flow should lead to increased cash returns.

Rightmove shares are still above the level seen prior to bid interest, with UBS continuing to like the property portal as a market-leading, relatively resilient cash generator with the potential for profit acceleration. The price target is 815p, compared with 643.8p currently.

The year-to-date performance of Trustpilot has been the best in the top 10, but UBS sees no reason to remove the consumer reviews platform as it forecasts further upside to 270p.

As well as Jet2, the other stocks no longer on the list include recruitment firm Hays. UBS remains positive on the FTSE 250 stock but sees limited catalysts on the horizon to inspire reacceleration in this highly cyclical name.

Hiscox Ltd (LSE:HSX) also remains attractive, but with capital distribution potential marginally subdued due to Hurricane Milton the near-term preference has shifted to turnaround story Direct Line.

The bank continues to like Trainline (LSE:TRN) but sees greater near-term upside elsewhere, while Man Group (LSE:EMG) also makes way. Bodycote (LSE:BOY) drops out as UBS has ceased coverage, with Keywords Studios no longer included as its takeover is due to complete later this month.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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