Machinations | finnCap Industrial Technology quarterly sector note - June 2021

Jun 15, 2021 / News

Highlights this quarter

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The recovery gathers pace

Company trading updates have been increasingly positive in recent months, as many point to an economic recovery that is gathering momentum, resulting in trading being better than expected and order books starting to show sustained improvement. Indeed, the rate of upgrades runs 60% greater than downgrades. A broad range of economic data confirms the recovery has gathered pace over recent months, supporting companies’ and analysts’ optimism. The UK PMI data for May now stands at 65.6 points, its highest for many years, while the Bank of England now predicts the fastest pace of economic growth since World War II. Many companies that have taken costs out during the pandemic should experience an accelerated drop-through.

The spectre of inflation

Not all the news has been good, though, with several stresses in the supply chain causing problems. Often the output of raw materials and commodities has not kept pace with recovering manufacturing needs, resulting in a severe price spike across many commodities. There have also been noticeable logistics and transport price increases, which have added to the pressure now being widely experienced on input prices.

We focus on some interesting growth stocks

We highlight a couple of interesting small-cap stocks where we see considerable growth opportunities over the next few years. We take a look at Itaconix, a unique patented plant-based polymers manufacturer, whose ingredients are expected to trigger a strong substitution effect in the speciality chemicals sector, as customers seek to reduce their carbon footprint. We also highlight Synectics, where we look for strong recovery opportunities to emerge as the oil & gas and gaming markets reopen and recover. We also see strong growth prospects from its Synergy security and surveillance platform, as recently evidenced by two prestigious contracts, one for the Berlin S-Bahn and, more recently, a ground-breaking project in London across several authorities and agencies. We also take a look at Enteq Upstream, a downhole equipment manufacturer, highlighting the recovery prospects in its underlying gas markets. The company’s recently developed SABER RSS system is expected to disrupt the market, with significant growth opportunities in a product area expected to see strong growth.

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