2 top small-cap shares I’d buy in December

Bilaal Mohamed thinks now could be a good time to add these small-cap growth stocks to your portfolio.

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Cloud computing specialist Iomart (LSE: IOM) declared a maiden interim dividend of 2.25p per share this morning as it reported another good period of trading in the first half of its financial year. By mid-morning the technology firm’s shares were up almost 3% on the news.

Reach for the cloud

The Glasgow-based group has rapidly grown into one of Europe’s leading cloud computing companies, having become one of the most widely respected and most trusted providers of business-critical cloud and managed hosting services. In a nutshell, these services enable customers to reduce the cost, complexity and risks associated with maintaining their own web and online applications.

The majority of the group’s sales are generated by its Cloud Services segment, which has continued to perform well, delivering an overall revenue growth rate of 13%, helped along by contributions from Christie Data which it acquired in August 2016, and the more recent purchases of Dediserve and Simple Servers in May and July of this year. Last month the group also acquired Salford-based eCommerce specialist Sonassi for £16.5m.

Iomart’s smaller segment, Easyspace, also performed well delivering a more modest 2.3% rise in revenues to £6.7m, all of which was organic. Easyspace provides a range of products to the small and micro business community including an ever wider range of domain names, shared hosting, emails and dedicated servers. Total group revenues for the six months to 30 September came in 12% higher than in FY2016/17 at £47m, with adjusted pre-tax profits rising 9% to £11.6m.

Proven track record

Despite its rapid growth, Iomart is still a relatively small software company when compared to the likes of industry giants Sage and Micro Focus International, but the AIM-listed business is profitable, cash generative and well placed to capitalise on the growing cloud computing market through a proven successful strategy of both organic and acquisitive growth.

Iomart’s shares are up by a third already this year and trade on a pricey earnings multiple of 20, but I reckon this isn’t too demanding for a technology company with a proven track record of solid growth.

Long-term relationships

Another small-cap stock that looks great value right now is engineering group Costain (LSE: COST). The Maidenhead-based firm deploys technology-based solutions to meet urgent national needs across the UK’s energy, water, and transportation infrastructures.

Costain’s strong market position, reputation for innovation, and wide range of integrated services has enabled it to secure over £600m of new contract awards and extensions to existing contracts so far this year. Consequently, the group’s order book now stands at a whopping £3.7bn, 90% of which comprises repeat business, proving again that building long-term relationships can be highly lucrative for any contract-based business.

Costain’s rapid growth has led to the shares doubling in value over the past five years, but despite this, they still trade on a fairly modest price-to-earnings ratio of 13. I think they’re worthy of a higher rating.

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.

Bilaal Mohamed has no position in any 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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