Investors have been selling off housing-related stocks at an astonishing clip since the EU Referendum vote, which makes the nearly 20% gain for shares of replacement window manufacturer Safestyle (LSE: SFE) since June 22 all the more impressive.
Even after this stellar performance, I reckon the future is still very bright for this £250m market cap minnow. Reason number one is that Safestyle is growing very quickly as it expands out of its traditional northern base into wealthier southern areas of the country. Over the latest half-year period to September the company enjoyed a 12.8% jump in year-on-year revenue as it installed more units and increased average order value by a full 9.1%.
Another bit of good news is that this rapid expansion isn’t overtaxing Safestyle’s balance sheet. Despite opening new sales offices in the south and commencing on an expansion to its current production facilities, the company actually increased its net cash position by more than 50% to £23.6m at the end of September. This increasing pile of cash and solid margins has allowed management to increase dividends enough that shares now offer a 3.47% annual yield.
Of course, you may be raising the very valid point that the health of the replacement window sector is inexorably tied to the health of the domestic housing market. That is true, but Safestyle is more recession-resistant than many believe due to the very fragmented nature of the market. During the last recession the company actually kept its total sales relatively flat by taking market share from smaller competitors. Safestyle is now the largest player in the market but with only 10% market share there’s definitely room to repeat this trick in any future recessions.
I’m not ready to buy shares just yet with valuations stretched to 15.6 times forward earnings, but Safestyle is definitely one of my small caps to watch in 2017.
US success
Another small cap growing at a rapid clip that I have my eye on is Advanced Medical Solutions (LSE: AMS). As AMS’s name suggests, it designs, manufactures and sells medical technologies with a focus on the wound care market. The company’s latest interim results saw revenue grow 20% year-on-year.
The biggest driver of this increase was an 83% rise in sales of its Liquiband wound adhesives in the US. Liquiband now has 19% market in the States but management is confident that it can continue to increase uptake among surgeons and hospital administrators who like the products’ impressive medical outcomes and relatively low costs. Its other products are only now beginning to achieve a foothold in the US, but if they can replicate Liquiband’s success, the company’s future is bright indeed.
AMS isn’t solely reliant on Liquiband or the US, though. Other major markets include Central Europe and the UK, where cash-strapped NHS systems have fallen head over heals for its products. The company also sells wound dressings, sutures and bulk products to a variety of customers.
Cutting-edge designs and a focus on costs helped improve operating margins to a stunning 24.2% at the end of June. Combined with stellar growth prospects and £41.1m of net cash on the balance sheet, AMS is definitely one to watch in 2017 despite a pricey 28 times forward P/E ratio.
