Top FTSE 250 shares to watch in August 2023
Currys, NextEnergy Solar Fund, and JD Wetherspoon could constitute the three best FTSE 250 stocks to watch in August 2023.
The UK’s domestically focused index, the FTSE 250, has had a rather average 2023 — but due to a better-than-expected CPI inflation print, it has risen by 3.75% over the past five days, and is now in the green at circa 19,264 points.
Much of the recent rise can be attributed to falling inflation. CPI fell from 8.7% in May to 7.9% in June — exceeding forecasts of a drop to 8.2%. Consequently, market expectations from Schroders that the base rate could rise to 6.5%, or according to JP Morgan, to as high as 7% in a worst-case scenario, seem to have tapered down.
However, while the markets are set by expectations, it is worth noting that 7.9% CPI inflation is still higher than the 7.0% print of March 2022, and almost quadruple the official 2% target. And analysts still believe that the base rate will rise to 5.75% by the end of the year — and stay there for some time.
Former Bank of England Governor Mervyn King believes that rate rises will tip the UK into a recession, a view shared by Legal & General chief investment officer Sonja Laud. With FTSE 250 shares largely dependent on a healthy UK economy, the recent good news should still be viewed in context.
But where there’s doubt, there’s often opportunity. And there are still many FTSE 250 companies worth considering.
FTSE 250 shares to watch
Unlike many FTSE 250 unknowns, Currys is a company which almost every UK investor will have heard of. The electronics retailer suffered during the pandemic and has fallen by a whopping 70% over the past five years to 54p today.
In poorly received full year results released on 6 July, the business informed investors that adjusted earnings before interest and tax had fallen by 24% year-over-year to £66 million. Despite UK earnings rising by 45% to £53 million, profits in its Nordics division slumped by 82% to £26 million.
However, it noted that competitors in North Europe are currently slashing prices to get customers, which it believes is not sustainable over the longer term — and that profitability in the division will return after a period of volatility. It’s worth noting that Currys shares fell to as low as 48p on results day, so there has already been a mild recovery — and shares were changing hands for as much as 82p in Q1.
Of course, the final dividend has been cut to shore up the cash position. But insiders including the Chair and CFO bought more shares on results day — and Frasers has rapidly built up an 11.06% stake, adding to its prolific high street retailer holdings.
2. NextEnergy Solar Fund
NextEnergy Solar Fund is attractive for a different reason; it currently sports a 7.7% dividend yield and is at a hefty discount to its net asset value. For context, its shares trade for 97p and its NAV stands at 114.3p.
And the shares have dropped sharply since mid-June, presenting a potential buying opportunity.
The company has a target FY dividend of 8.35p, with forecasted cash dividend cover of 1.3x-1.5x. It’s paid out £305.8 million in dividends since the IPO, and has 99 solar assets with 865MW installed, worth £1.2 in billion gross asset value. And it’s also aiming to grow in the energy storage market — which is top of the political agenda given the energy disaster of last winter.
With the UK planning to add circa 30GW of storage capacity, NextEnergy’s new focus on energy storage puts it in a strong position, especially as it is already highly cash generative. The company has changed its internal rules to allow further investment in energy storage — rising from 10% of gross value to 25%.
Construction of its first standalone 50MW battery storage project is due to commence shortly. It’s acquired the development rights to a 250MW project in east England, formed two JV partnerships with Eelpower to target a £300 million pipeline of energy storage opportunities, and announced a retrofit programme to add battery storage to its existing solar assets.
Better yet, the majority of its regulated revenues are tied to the RPI index, giving it some immunity from the UK’s sky-high inflation.
3. JD Wetherspoon
JD Wetherspoon shares have risen by 54% year-to-date to 698.5p, buoyed by post-pandemic spending, good weather, and its reputation for value amid the cost-of-living crisis.
Interestingly, the company recently noted that its offering attracts customers from all income ends, — ‘a recent survey by market researchers CGA indicates that the average income of Wetherspoon customers is 7% above that of the average ‘high street pub consumer.’
In July’s trading update, like-for-like sales for the first 10 weeks of the final quarter of its financial year increased by 11%, when compared to the same period in the last full financial year before the pandemic (2019). And compared to FY22, like-for-like sales increased by 11.5% in the fourth quarter to date and by 12.9% year-to-date — leaving JDW with financial headroom of £289 million.
As of 9 July 2023, net debt had fallen by £114 million to £688 million, despite investing £116 million in new pubs, £82 million in freehold reversions, and raising £240 million in equity. And Wetherspoon’s free cash flow in this financial year is now anticipated to be ‘substantially in excess of its profit before tax.’
Best of all, waivers for its banking covenants from its banking syndicate that were put in place during the pandemic ‘will no longer be required at the end of the current quarter.’
Further share price increases may be incoming.
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