2 cheap technology small-caps for 2017

Edward Sheldon identifies two small-cap tech stocks with compelling prospects.

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While there’s not an abundance of technology stocks listed in the UK, there are some interesting opportunities to be found in the small-cap area of the market. Here’s a look at two small technology stocks that have caught my eye recently. 

Softcat

Softcat (LSE: SCT) is a provider of IT infrastructure to the corporate and public sectors. The £590m market cap company provides organisations with datacentre, networking and security solutions and provides the services to design, implement, support and manage these solutions.

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Although Softcat only listed on the London Stock Exchange in November 2015, the company has been in existence for over 20 years, growing significantly in this time. In the last five years alone, revenue has more than tripled from £219.2m in FY2011 to £672.4m in FY2016 and the impressive growth is forecast to continue, with City analysts pencilling-in revenue of £744.4m and £813.0m for the next two years.

The stock enjoyed a strong yet volatile run immediately after floating, rising from 240p to around 380p, however the Brexit result caused investors to panic and the shares were sold-off heavily. Softcat now trades at just under the 300p mark and at this price, the shares trade on a forward looking P/E ratio of 15.1, which seems relatively low given the company’s growth history.

Softcat also has appealing dividend prospects, with the company rewarding its shareholders last year with regular dividends of 5.3p as well as a generous special dividend of 14.2p. Analysts anticipate regular dividends of 10.3p per share for FY2017, a yield of 3.5%.

Although Brexit could potentially affect earnings, I believe that demand for cyber security and data storage services will remain robust in the coming years, and management recently stated that the company was off to a good start in 2017. After a 20% share price drop in the last six months, Softcat appears to offer broad exposure to the IT sector at a reasonable valuation.  

IQE

Semiconductor wafer manufacturer IQE (LSE: IQE) has also screened up as a fast-growing technology stock trading at an undemanding valuation. IQE manufactures wafers that are used by major global chip companies to produce chips used in technology such as smartphones, infrared systems, solar cells and LED lighting.

The £272m market cap firm generates around 60% of its sales from the US, 10% from Europe, and the remainder from the Asia Pacific region and revenue has grown significantly in recent years, climbing from £72.7m in FY2010 to £114m in FY2015.

The company announced in December that trading had been “strong across multiple markets”, and that it was on track to deliver FY2016 revenue and adjusted operating profit ahead of market expectations. City analysts forecast revenue and earnings per share of £129.3m and 2.91p respectively, meaning that the company trades on a forward looking P/E ratio of just 13.7.

While IQE has enjoyed strong share price momentum in the last six months, rising from 17p to 40p today, the company still looks attractively valued at the current price and it would not surprise me to see the share price run further this year.

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