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2 under-the-radar small-cap stocks you probably haven’t considered

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Cleaning commercial kitchen fryers and disposing of used cooking oil is something of a maintenance headache for commercial kitchens. But out of such problems come business opportunities.

AIM-listed Filta Group (LSE: FLTA) started out providing used oil filtration and fryer cleaning services. It’s since expanded and offers a range of related services to customers in the UK, US and most recently Canada.

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Filta only floated on AIM in November 2016, so we don’t have much history to go on. But the company published its latest interim results on Thursday morning, sending the shares up by 9%. This sounds like a potentially interesting growth business to me, so I’ve been digging into the figures to find out more.

Sales up 39%

The group reported 12 new franchise sales for the period, taking its total number of franchisees to 182. Growth was strong in most areas of the business, and a recent acquisition will also broaden the firm’s service offering.

Filta’s headline financial figures suggest that this operational growth is translating into rising profits. Group revenues rose by 39% to £6.6m during the six months to 30 June, while the group’s underlying operating profit rose by 62% to £1m.

Filta reported earnings per share of 2.6p for the half-year period, and the board has declared an interim dividend of 0.65p per share. In my view, both of these figures are consistent with analysts’ full-year forecasts for earnings of 6p per share and a total dividend of 2p per share.

These figures give the firm’s shares a forecast P/E of 26 and a prospective yield of 1.4% for 2017. This isn’t cheap, but it could be a reasonable basis for an investment if the firm’s growth continues at current rates.

Too cheap to ignore?

One of the small-cap stocks in my personal portfolio is recruitment group Harvey Nash (LSE: HVN). This £60m firm operates in three main areas — executive search, professional recruitment and outsourcing.

The majority of the group’s profit is generated in the UK and mainland Europe, but the firm’s outsourcing operations mean that it’s also quite active in Asian markets such as Vietnam. Like other small companies in this sector, Harvey Nash was affected by last year’s Brexit vote.

The group’s results for 2016/17 suggested that market conditions were mixed, as pre-tax profit fell by 6% to £8.5m and earnings per share were 8% lower, at 8.7p. However, the group’s strong cash generation wasn’t affected, and year-end net cash rose from £0.2m to £5.6m. Shareholders were rewarded with a 7% increase to the final dividend.

Looking ahead, Harvey Nash’s latest trading update indicates that trading is in line with expectations so far. Ongoing recruitment of contractors is said to be “comfortably ahead of last year” and measures are being taken to cut overheads by around £1m per year.

Brokers’ consensus forecasts for the year have risen sharply over the last few months. Earnings are now expected to rise by 20% to 10.4p per share this year, putting the stock on an undemanding forecast P/E of 8.

The dividend is expected to be lifted 5% to 4.3p, providing an attractive and well-covered yield of 5.2%. I continue to view this stock as a buy for income and growth.

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Roland Head owns shares of Harvey Nash. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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