One of the big attractions of investing in small companies is that they can double in size while still remaining small. The chances of finding a multibagger are much higher than they would be in the FTSE 100.
In this article I’m going to take a closer look at two small-caps I believe offer attractive growth potential, backed by solid financials.
The next Woodford?
Fund manager Miton Group (LSE: MGR) has made its name as a specialist small-cap investment firm. The company’s star attraction is Gervais Williams, who is the group’s head fund manager and an executive director of its board. Mr Williams also owns 6.9% of Miton stock. This should ensure that his interests are well-aligned with those of shareholders.
The group’s share price has risen by 86% over the last year, but it remains a small company, with a market cap of just £66.7m. Recent trading suggests to me that the outlook for growth remains strong.
Assets under management rose by 15% to £3,354m during the six months to 30 June, compared to a gain of 9% for the FTSE SmallCap index and 13% for the AIM All-Share Index. The increase in assets was divided fairly equally between investor inflows (up by £195m) and investment performance (up £254m). This suggests Miton’s strong fund performance is attracting new investors.
To support shareholder returns, the group used some of its net cash to buy back £2.6m of shares earlier in the year. Net cash at the end of June remained fairly high, at £18.2m, so further shareholder returns may be possible.
The stock isn’t quite as cheap as it was, but still looks reasonably priced on a 2017 forecast P/E of 16, falling to a P/E of 13.5 for 2018. I’d hold on for more at current levels.
Valuable information
Many publishing and media companies are struggling to stay profitable in the internet age. One of the few remaining areas of profitable growth lies in providing information-based digital services to corporate customers.
That’s where Centaur Media (LSE: CAU) comes in. This group provides “business to business information, insight and events”. Its share price has risen by 14% this year, as it’s continued a shift away from print media and towards business-to-business services.
The latest step forward came last week. Centaur announced the sale of its Home Interest consumer business for £32m, and the acquisition of the UK’s number one telemarketing agency, MarketMakers, for a total of up to £20.1m.
This company is midway through a complex shift in its operations. But its financial performance seems to be improving. Net debt has fallen steadily and the group is expected to report modest revenue growth this year.
Broker forecasts put the stock on a forecast P/E of 13 for 2017, falling to 11.5 in 2018. This level of earnings should be enough to cover the group’s 3p per share dividend, which provides a yield of 6.1%. City analysts expect this dividend to be maintained and have an average price target for the stock of 59p — 20% above current levels. In my view, Centaur could be a profitable buy over a three-to-five-year timeframe.
