Three very different growth opportunities for small-cap investors.
Small-cap shares offer opportunities for rapid growth and access to interesting niches that simply are not available with big-cap FTSE 100 companies.
I've been trawling through recent updates from small-cap companies and have found three opportunities I think might be worth a closer look. Each is completely different, and I think that all three offer decent potential for medium-term growth.
1) DQ Entertainment
India is one of the world's biggest growth economies and two of its particular strengths are its IT industry and its movie industry -- better known as Bollywood.
DQ Entertainment (LSE: DQE) founder Tapaas Chakravarti combined both these skill bases to create an animation production company. Its main business is 2D and 3D animation for films, television and computer games, and it has an extensive roll call of clients and credits across Europe, the US and India.
DQE floated on the AIM in 2007, and has so far gathered numerous creative awards and 11 Emmy nominations. Since its flotation, DQE's share price has varied between about 150p and 35p, despite growing its revenues every year from $24m in 2008 to $47.3m last year and maintaining an unbroken record of profitability.
3D profits
DQE has just published its latest annual results, showing revenues up 4.3% to $47.3m, profit before tax up 36% to $9.8m and cash of $12.4m. As well as revenues from its animation productions, it also makes an increasing amount of money from merchandising deals.
DQE's 2011 credits include involvement in Cars 2 and Kung Fu Panda, each of which took more than $500m at the box office. It currently has broadcasting agreements in more than 150 countries and global licensing and merchandising deals for a number of popular franchises, including The Jungle Book -- it recently sold the US rights to its new 3D HD Jungle Book television series to Disney (NYSE: DIS.US) in the US.
Mean valuation
DQE currently has a market capitalisation of £15m, placing it level with its tangible book value. Yet it has a further $85m (£53m) of intangible assets and goodwill on its balance sheet, which I believe adds real value; intangibles like copyright, intellectual property and licensing deals are important assets in this business. Including these assets places DQE at a price-to-book ratio of just 0.25.
DQE's order book currently stands at $168m, 50% higher than at the same time last year. Given that its operating margin last year was 28% (23% in 2011), pre-tax profits for the year ahead should be considerably higher than they were this year.
DQE shares currently change hands at around 40p, giving the company a price-to-earnings (P/E) ratio of just 4. I think this is a fairly mean valuation, given the business' strong order book, diverse customer base and growing intellectual property portfolio.
2) St. Modwen Properties
The recovery of the UK housing developers like Persimmon (LSE: PSN) has been well covered by other Fool writers, but regeneration specialist St. Modwen Properties (LSE: SMP) has maintained a lower profile.
This company specialises in redeveloping existing sites -- often old industrial or commercial sites. These are then redeveloped into a mixture of residential, industrial and commercial properties before being sold on or rented.
Half of St. Modwen Properties' residential land bank is in the south east, something that has protected it from the worst of the price falls seen elsewhere in the UK. In a pre-close trading statement issued today before its half-year results are published, it said that housing sales and commercial projects were progressing well, and that its pipeline of property development profits for 2012 was now secure and expected to be ahead of 2011.
Rental returns
The other strand of St. Modwen's business is its rental portfolio. By value, 50% of its portfolio is classed as income-producing and rental income totalled £35.5m in 2011, with the company generating a respectable 8.8% rental yield.
This revenue is used to help fund development projects and keep the company's gearing down to a very acceptable 73%, substantially below its 175% banking covenant restrictions.
Value
As a value play built around property, St. Modwen is all about assets, and here it makes a strong case for itself. It currently trades at a 28% discount to its most recent net asset value and offers a modest 2% dividend yield.
St. Modwen's half-yearly report is due soon, including an updated valuation and the possibility of a dividend increase -- so you might want to wait for that before buying -- but I'm fairly confident it will make enjoyable reading.
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3) FfastFill
FfastFill (LSE: FFA) is a specialist software company that provides software solutions to the global derivatives trading industry. It basically provides all the software you need to buy and sell exchange-traded derivatives, including risk management facilities.
FfastFill has 80 customers globally, including 25 on the London Metal Exchange. Its main focus is on its SaaS (Software as a Service) offering. SaaS is an IT business model where you sell someone the use of software rather than the software itself. It's equivalent to using Google Docs online rather than buying a boxed copy of Microsoft Office, and has a number of advantages for mission-critical systems that need to be centrally managed and updated.
Fat order book
Like DQE, FfastFill has just published its annual results. Revenues rose from £15.5m to £17.2m, but operating profit fell from £1.8m to £0.6m thanks to heavy investment in infrastructure upgrades and two well-targeted acquisitions.
FfastFill is a young company that's growing fast. Its annual revenues have risen from £11.4m in 2008 to £17.2m last year, and it has been in profit for the last three years. However, the investment phase of its expansion is now over, and the year ahead should bring a big increase in profits and revenues.
A 12-month order book of £20.7m (2011: £14.1m), net cash of £2.2m and no debt should enable FfastFill to maximise its profitability this year. Its share price is already up 50% over the last six months, but I reckon the year ahead could bring another growth spurt as it is able to realise the profit potential of its expanded business and improved infrastructure.
Over to you…
If any of this threesome interest you, then this article should provide a starting point for further research. While St. Modwen Properties is a fairly safe bet, FfastFill and DQE include a higher element of risk in return for their multi-bagger potential.
You can find some more tips for interesting growth opportunities in the special Fool report Top Sectors For 2012. It contains a mixture of big and small-cap share ideas, including one smaller company I'd not heard of before. It's completely free, so why not take a look?
Finally, I'd love to hear your thoughts on any of these, so if you have an opinion, why not share it in the comment box below?
He avoided techs in the dotcom bubble and banks in the credit boom. But just where is dividend expert Neil Woodford investing today? All is revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".
Further investment opportunities:
> Roland does not own any of the shares mentioned in this article.
