Could 20% profit growth help Patisserie Holdings plc & IG Design Group plc double in 2017?

Will profits continue to rise at small cap success stories Patisserie Holdings plc (LON:CAKE) and IG Design Group plc (LON:IGR)?

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Pre-tax profit rose by 18.2% to £17.2m at upmarket café and cake shop operator Patisserie Holdings (LSE: CAKE) last year. The group’s shares have risen by 9% so far today, but are still worth 31% less than they were at the start of the year.

Patisserie’s roll-out appears to be delivering stunning returns. Has the stock’s decline given investors a second opportunity to get involved with this impressive growth story? In today’s article, I’ll take a closer look.

I’ll also ask whether fast-growing giftware group IG Design Group (LSE: IGR) is worth buying after today’s impressive results.

Tasty growth could continue

Patisserie Holdings’ main brand is the Patisserie Valerie chain of café and cake shops. Growth was strong last year, with sales up 13.3% to £104.1m, and earnings per share up by 20.1% to 13.6p. The final dividend has been increased by 20% to 2.0p per share.

Patisserie opened 21 new stores during the year, taking the total number of stores to 184. The company is continuing to target 20 new store openings each year, and says that a number of last year’s new stores are trading “ahead of expectations”.

What’s so impressive about this business is that the rollout of new stores is being completely funded from Patisserie’s operating cash flow. Despite also paying a dividend, Patisserie has no debt, and ended last year with net cash of £13.3m.

Although the group’s rollout will eventually reach a natural limit, we don’t seem to have reached that point yet. It’s also worth remembering that as the group gets larger, each new store will make a smaller contribution to profits, in percentage terms.

Today’s results give Patisserie Holdings a trailing P/E of 20.5, and a trailing yield of about 1%. Earnings are expected to rise by 15% to 15.6p in 2016/17, putting the stock on a forecast P/E of 17.9.

Overall, my view is that Patisserie Holdings is reasonably priced at current levels. Growth investors may want to take a closer look.

These shares could be a gift

Sales at giftware group IG Design rose by 21.5% to £145.5m during the first half of the year, according to today’s interim results. Adjusted pre-tax profit rose by 57.5% to £8.2m, while underlying earnings per share were 50% higher, at 9.6p.

The company’s shares have risen by 5% to 289p following today’s news. The second half of the year includes the key Christmas trading season, and management believes that full-year performance “is now expected to be above current market forecasts”.

The growth potential of IG Design looks significant, in my view, but there are downside risks too. Earnings growth during the first half came from organic growth (20%), acquisitions (10%) and currency movements (20%).

IG Design’s move into the US market appears to be going well. UK growth also seems strong. The obvious risk is that the pound will rise against the dollar. This could hit IG’s profits, and cancel out gains from organic sales growth.

After today’s results, I estimate that full-year earnings of about 17p–18p per share are possible. This would put IG on a forecast P/E of 16. In my view, that’s a fair price. Although I’m concerned about potential currency risks, I believe IG Design could deliver further gains for shareholders in 2017.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Patisserie Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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