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2 under-the-radar small-cap value stocks

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Today I’m going to look at two small-cap stocks that are below the radar of most fund managers. They’re simply too small.

Being neglected by the City sometimes creates attractive buying opportunities for value investors. I believe that could be the case with these two companies.

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Profits up 11%

The Mission Marketing Group (LSE: TMMG) is a specialist marketing and advertising firm which operates 15 agencies. According to today’s interim results, recent client wins include Neff, Mars, Revlon and Universal Studios.

This operating progress appears to have driven a solid financial performance. Although revenue fell by 4% to £71.2m during the period, this includes pass-through costs such as television advertising. Operating income, which excludes such costs, rose by 4% to £33.8m, while headline pre-tax profit rose by 11% to £2.9m.

Cash flow from operating activities rose by 20% to £5.8m, compared to the same period last year. This enabled the firm to reduce its net bank debt by £2.1m during the period, despite settling £3.5m of acquisition liabilities.

What’s the outlook?

Last year’s performance was heavily weighted to the second half of the year, when almost two-thirds of profits were generated. Management guidance in today’s results is for a similar performance this year.

On that basis, I estimate that the group’s half-year adjusted earnings of 2.58p per share should translate into full-year earnings of about 7.5p per share. That’s slightly ahead of broker forecasts and puts the stock on a forecast P/E of just 6.1. A forecast dividend payout of 1.6p per share should give a yield of 3.6%.

Although this type of business could be hit hard by an economic downturn, these shares look good value to me at current levels and could be worth a closer look.

An overlooked property play

Property-related stocks were hammered by the sell-off that followed the EU referendum last year. But much of this doom and gloom has proved unecessary, at least so far.

The good news for investors is that some quality small-caps are still available at very affordable prices. One example is LSL Property Services (LSE: LSL), which operates a surveying business and several estate agencies.

Like most estate agency businesses, these serve both the selling and letting markets. So even in areas where house sales are slowing, letting demand should help to support profits.

Although revenue was unchanged at £151.5m during the first half of the year, LSL’s underlying operating profit rose by 37% to £15.5m during the period. This suggests that the cost-cutting and restructuring measures taken last year have paid off.

One area where the company is investing for growth is online. LSL recently acquired a 17.3% stake in internet estate agency Yopa. The plan is to provide some services to Yopa and potentially to make more online services available in LSL’s estate agency business.

This year’s surge in profits isn’t likely to be repeated next year. But earnings are still expected to climb by around 6% in 2018.

In the meantime, the group’s shares trade on an undemanding forecast P/E of 9.3, with a prospective dividend yield of 4.3%. In my view, this could be one of the better value buys in the property sector.

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Roland Head 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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