3 UK mid-cap stocks for growth and solidity on the cheap

UK mid-cap stocks - Tate & Lyle food scientists — (Image credit: Tate & Lyle)

The Merchants Trust aims to deliver an above-average level of income and income growth, together with long-term capital growth, by investing primarily in high-yielding UK large cap companies. It has paid a rising dividend for 43 consecutive years. We seek firms with strong fundamentals trading below their intrinsic value, ideally in sectors with robust long-term growth prospects. Recently, we have found value in medium-sized businesses, including the three highlighted below.

Three UK mid-cap stocks to consider

Tate & Lyle (LSE: TATE) is a manufacturer of speciality ingredients, not to be confused with the sugar brand. It works with food makers to reformulate products to reduce sugar, calories and fat, while adding fibre, protein and other ingredients. The firm should be capable of steady growth while earning high returns thanks to the technical skills and solutions it can provide to manufacturers. Tate & Lyle has been through a long period of transformation, selling its more commoditised US corn-processing business and making several acquisitions of speciality-ingredients companies, adding a broader range of product lines and new relationships with customers.

While this process has improved the quality of the business, it has held back earnings. Moreover, the recent trading environment has been difficult, especially in the key US market, where consumers have reduced their food purchases owing to higher inflation. This combination of events has led to earnings downgrades, and the shares have derated very significantly. In our view, Tate & Lyle is a stronger business than it was a few years ago, but is also trading at a far lower valuation, which we think spells opportunity.

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Hikma Pharmaceuticals (LSE: HIK) is a manufacturer of generic, branded and speciality pharmaceutical products, operating across North America, the Middle East, North Africa and Europe. The business operates through three divisions: injectables, branded and generics (now called Hikma Rx). The company is vertically integrated, with manufacturing largely carried out in-house.

It benefits from several positive structural themes. Pressure on health budgets is encouraging greater use of generics, including injectables. Demand for healthcare is growing as populations age, novel treatments are being developed and, especially across the Middle East and Africa, populations are growing and becoming wealthier. Historically Hikma has reported strong growth in sales and profits. The company has typically traded at a high valuation, reflecting the strong competitive position and growth potential. However, several events brought the valuation down to a low level. The pharmaceutical sector has generally derated and Hikma also had some specific issues and management changes. The shares fell heavily, providing a chance to buy a strong stock at an attractive valuation last year.

Whitbread (LSE: WTB) owns the UK's largest hotel chain, Premier Inn, which is expanding into Germany. The business has a strong competitive advantage over peers owing to its scale, its brand and a large base of freehold assets. The investment case centres on its five-year growth plan: to repurpose underperforming restaurant space into additional rooms; grow the estate in the UK and Germany; drive efficiencies and recycle capital for investment and share buybacks. In our opinion, the strong competitive position and the medium-term growth prospects have not been reflected in the share price.

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Simon is Chief Investment Officer, UK Equities and is head of the Value & Income Investment Style Team. He manages The Merchants Trust plc, co-manages the Allianz UK Listed Equity Income Fund, and is deputy portfolio manager on The Brunner Investment Trust and the Allianz UK Listed Opportunities Fund.