One ‘secret’ growth stock I’d consider with IGAS Energy plc

Why IGAS Energy plc (LON:IGAS) may now be a contrarian buy.

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Today I’m going to take a look at a stock that’s risen 511% so far this year. Can this stock market rocket continue climbing, or should investors consider taking some profits?

I’ll also look at the outlook for oil and gas group IGas Energy (LSE: IGAS). With the price of oil rising and a successful refinancing under its belt, is now the right time to take a fresh look at this firm?

Follow the smart money

IGas’s oil and gas assets fall into two categories. The company has a number of conventional UK onshore oil and gas fields, producing about 2,250 barrels of oil per day. But the big hope for future growth is shale gas, where IGas has one of the largest positions in the UK.

One clue that these assets might have potential is that energy industry specialist Kerogen Capital contributed £29m to the group’s refinancing, giving it a 28% stake in the firm. Kerogen is also a major backer of North Sea success story Hurricane Energy, suggesting to me that the company’s stock picks could be worth following.

As a result of several partnership deals, IGas is set to benefit from up to £183m of funded exploration work by its partners. Although the prospects for UK shale gas are still highly uncertain, the company is now well positioned to benefit if early exploration efforts are successful.

In the meantime, rising oil prices should improve the cash generation of the firm’s conventional oil assets. With operating costs of just $28.50 per barrel during the first half, the current Brent Crude price of about $60 should ensure the group continues to generate cash to fund its ongoing operations.

IGas isn’t without risk, but at under 80p per share, I believe the stock could be a speculative buy.

A surprise winner in 2017?

Tech firm Zoo Digital Group (LSE: ZOO) specialises in providing dubbing services for television and movie content. So if you want your film to be voiced and subtitled in a different language, for example, Zoo Digital could help. According to the group’s website, customers include Sony Pictures and Universal.

The shares have risen by a staggering 511% already this year, and now trade on a demanding 2017/18 forecast P/E of 100. So does the group’s current growth rate justify this premium valuation?

Half-year results published on Monday show that revenue during the six months to 30 September rose by 63%, to $12.7m, compared to the same period last year. Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 34% to $1.3m over the same period. Another piece of good news is that the group has reduced its dependency on its largest customer from 47% of revenue to a safer 28%.

I believe this could be a successful growth business. My main concern is that profitability doesn’t seem to be improving as it expands. The firm’s half-year operating profit of $413,000 gives an operating margin of just 3.2%. That’s actually lower than the 4% figure for the same period last year.

Zoo is spending money on expanding its capabilities, which makes sense to me. But I believe profit margins need to rise quite soon to justify the stock’s current valuation. I’d need to do more research before deciding whether to invest.

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.

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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