2 growth stocks to buy before it’s too late

Two stunning small-caps that aren’t done growing just yet.

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Storing the physical records of businesses in warehouses may not seem like a growth industry in today’s cloud-led, paperless environment, but document storage firm Restore (LSE: RST) is showing that this isn’t the case. From 2011 to 2015 the company’s sale rose from £18.8m to £91.9m and I see no reason this trend will slow.  

Indeed in H1 2016 sales grew a full 26% year-on-year and EBITDA rose an even more impressive 37% in the period. The key has been the rapid integration of the record management assets purchased from Wincanton for £55m back in late 2015.

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And management isn’t done with the acquisitions yet as it completed the £83m purchase of PHS, the second largest document shredder in the UK, in August 2016. Restore has yet to release results that cover this period but the acquisition makes a great deal of sense.

Restore already had the UK’s third largest shredding business, so the combination of these two businesses will provide significant cost synergies, improve pricing power with customers and allow for greater cross-selling with major clients.

Looking ahead, I like that the company isn’t only growing through acquisitions. Management is planning for a paperless world and its document scanning business is growing quickly and is already the second largest in the UK.

Although the company’s shares look pricey at 21 times forward earnings I believe Restore is still a great option given a history of rapid growth, rising earnings and high shareholder returns.

A safer bet?

Another small-cap in a relatively unsexy industry growing quickly is replacement door and window manufacturer Safestyle (LSE: SFE). From 2012 to 2016 the company’s revenue increased 48% to £163m by consolidating a highly fractured market and moving from its Midlands base into the southeast of the country.

I believe the company still has plenty of room to continue growing organically as its market share at the end of H1 was still only 10%. It’s also encouraging to see that management is successfully raising prices even as it takes market share, which tells us that it’s growth isn’t due to deep discounting.

This increased focus on prices is evident in the improvement in EBITDA margins from 12.8% to 13.2% year-on-year in H1 2016, the latest period reporting these data. There’s room for margins to continue growing due to investments in a more efficient modern production facility and the efficiencies of scale that come from increasing market share.

Now, there’s no escaping the fact that the company’s fate is tied to that of the housing market. But a healthy balance sheet with £13.5m of net cash at year-end means the company is in no danger due to over-leverage. Furthermore, it took advantage of the financial crisis and quickly grew market share as smaller, less profitable, rivals were forced out of business. I see no reason this pattern can’t repeat itself in the future.

With its shares trading at a relatively attractive 15 times forward earnings while offering a 3.7% yielding dividend and plenty of room to grow, Safestyle is one small-cap I’d grab before it gets too popular.

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