Today I’m looking at two small-cap stocks from my own portfolio, both of which I believe could deliver significant gains for investors over the next couple of years.
A turnaround opportunity
Property and energy group Hargreaves Services (LSE: HSP) is midway through a transformation that should see it move out of the coal industry and become a property and renewable energy group.
Although the gradual decline of the group’s coal mining and distribution business has been painful, it’s become apparent that the company owns a lot of valuable land, equipment and coal stockpiles.
Many of these assets have now been sold, while the land is being channelled into alternative energy, industrial and residential developments. Management expects to generate £35m of value from land assets by 2021 — a significant amount for a £115m firm.
Alongside this, the group has continuing operations in the transport and construction sectors, as well as a specialist coal trading operation in Germany, where the industrial market for coal is much stronger.
Available at a 20% discount
Hargreaves published its interim results today. Revenue fell by 12% to £150.3m due to lower levels of asset sales, but underlying operating profit rose by nearly 10% to £2.3m. The group’s underlying earnings per share rose from 0.3p to 2.7p, supporting guidance for full-year earnings of 5.4p per share.
A fall in debt helped to lift the group’s net asset value from 406p to 423p per share. Based on the current share price of 350p, this suggests the group’s shares could climb by at least 20% as value is gradually realised from its assets.
Having followed this stock for several years, I’m comfortable with the company’s projected figures. The group’s guidance to date has been very accurate. Another attraction is that chief executive Gordon Banham owns an 8% stake in the company, so his interests should be closely aligned with those of shareholders.
Trading on a 2018/19 forecast P/E of 15 and with a 2% yield, I continue to rate this stock as a value buy.
This could sail away
Shipping services group Braemar Shipping Services (LSE: BMS) has faced difficult conditions over the last few years. Downturns in both the oil and shipping sectors caused demand for its broking and technical services to slump.
However, both oil and shipping appear to be turning a corner. Braemar has also cut costs and made several acquisitions which will increase the range of financial services it can offer.
Trading has been stable and full-year profits are expected to rise modestly this year. Brokers covering the stock have turned increasingly positive — forecasts for 2018 earnings have risen from 19.6p per share in February 2017, to 21.4p per share today.
This increase hasn’t yet been matched by the share price, which is currently slightly lower than it was a year ago. In my view, this could be a buying opportunity.
Like Hargreaves Services, Braemar has a strong balance sheet with very little debt. I can see no danger of financial distress, and the company’s cash flow has allowed it to continue paying a dividend, albeit reduced.
These shares currently trade on a forecast P/E of 11.5 with a prospective yield of 5.9%. I rate the stock as a buy, and may add more to my personal holding.
