These small-cap growth stocks could be millionaire-makers

I think these two growers look set to advance further.

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At today’s 165p, the share price of Ergomed (LSE: ERGO) has slipped almost 23% since the beginning of the year. But recent acquisitions and a strong pipeline of work look set to boost earnings per share during 2018 with City analysts projecting a rise of more than 150%.

The firm is making good strategic and operational progress that could propel the stock higher over time. Today’s interim results revealed revenue just over 30% higher than a year ago and a 42% lift in the gross profit figure.

Fast-growing services division.

The firm provides specialised services to the pharmaceutical industry and develops new drugs. The services division is growing fast and posted a 53% revenue increase during the first half of the year drawn from clinical research operations in over 40 countries. Meanwhile, the co-development division seeks partnerships with biotech and pharmaceutical companies where Ergomed delivers drug development services in exchange for carried interests in any revenues that the new drugs generate, which could come from sales and milestone payments.

The company signed service contracts worth £23m during the period and has a backlog of signed contracts pushing above £70m, which is almost 17% higher than a year ago. Meanwhile, several drugs in development could go on to generate decent income for the firm. Although for the time being more than 80% of the firm’s revenue appears to come from services rather than from carried interests.

Low debt

I like the firm’s low level of borrowings. The balance sheet in today’s report shows around £7k of debt being off-set by more than £2.4m in cash. But there was a cash outflow of a little over £1.3m in the period up from an outflow of £0.93m last year. Operating profit declined almost 9% due to a rise in administration, research and development costs.

I’m optimistic that the firm will soon find stronger feet when it comes to cash flow and profits and Chief Executive Dr Dan Weng is “confident that Ergomed is well positioned for further growth, both organic and through acquisition.” I reckon, with the forward price-to-earnings (P/E) ratio running a little over 13 for 2018, the firm is one to keep a close eye on.

Bioventix (LSE: BVXP) also updated the market with a trading update at the beginning of September. The firm specialises in the development and commercial supply of high-affinity monoclonal antibodies and earns its revenue by licensing the use of its creations to other firms that use them for clinical diagnostic work.

Low costs

Once again, the news from the company is good with revenues for the financial year to 30 June a little higher than £7m, which is more than 27% higher than the year before. The firm explains that because costs are only rising a little as revenues rise a lot, the directors expect revenues and profits for 2017 to be ahead of what the market was previously expecting — again!

Bioventix has been a dream investment for many over the past three years with the share price rising more than 320% due to ongoing operational progress and a valuation re-rating. Today’s 2,487p share price throws up a forward P/E rating of almost 29 for the year to June 2018, which looks full, but I reckon this stock has more to give.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. 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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