Two high-growth stocks that are just getting started

Fast-rising share prices for these small-caps could continue for a long time to come thanks to repeated and sustainable double-digit sales and profit growth.

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Consistent sales and profit growth from roadside fuel and retail store operator Applegreen (LSE: APGN) has seen the company’s share price rise from a mid-2015 IPO price of 308.5p to a current 538p per share. And with a major acquisition in the works, I think further stellar returns could be on the cards for the company in the future.

The company’s management team has proposed buying a majority stake in privately-held Welcome Break, which runs 24 motorway service areas, two trunk road service areas and 29 hotels across the UK. Welcome Break is a big player in the UK with operations last year generating £723.4m in revenue and £66.4m of adjusted EBITDA.

This will be a huge acquisition for Applegreen and the company’s management team has suspended share dealing while it prepares a full prospectus for investors. This makes sense since the proposed acquisition would be funded by €300m in new debt and at least €100m in new equity from investors.

But although this is a large and risky move for Applegreen, I think makes sense in the long term. For one, it fits into the group’s aggressive growth strategy that has seen it rapidly open or acquire roadside fuel and retail locations in the UK, US and Ireland. Last year alone the group added 99 outlets to take its total to 342 locations.

Furthermore, the management team has proven capable of generating profitable growth from its outlets. Last year like-for-like non-fuel sales at its locations increased 3.9% year-on-year. With new store openings and a focus on higher margin items like food, revenue rose 21% during the year to €1,428.1m with adjusted EBITDA up 24% to €39.8m.

By acquiring Welcome Break, the group would be increasing its margins, generating potentially significant benefits of scale, and improving cash flow that can be used to pay down debt or fund further expansion. Plus the CEO and COO aren’t doing this out of mere empire-building as their combined 52.49% stake in the business means plenty of their own money is riding on this going well.

This deal could be transformational for Applegreen and I’ll be keeping a close eye on the prospectus for the upcoming acquisition and fundraising.

Music to investors’ ears 

Another small-cap that’s done phenomenally well but could have further to run is audio hardware and software provider Focusrite (LSE: TUNE). Since going public in 2015 the company’s share price has risen from under 150p per share to now stand at over 460p.

The keys to this rapid share price appreciation have been consistent double-digit revenue and profit growth from this founder-run business, thanks to investments in R&D that has led to frequent new product releases. In the half year to February, the group’s revenue shot up 26% in constant currency terms to £38.8m, with operating profits up 36.3% to £6.2m.

With five new hardware products and five software upgrades released during the period, it’s clear management is not straying from its successful playbook. And with net cash of £19.7m on the balance sheet, there’s plenty of financial firepower to go out and do deals, ramp up internal investments, or fund more rapid expansion in growth markets like the US or Asia.

Either way, I think Focusrite is an exciting niche business that small-cap investors should keep on their radar.

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.

Ian Pierce 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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