I’d still dump Purplebricks for this small-cap

High dividend cover like this suggests to me the directors see plenty of growth potential in the tank with this company.

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In November 2017, I punched out an article with the snappy headline, Why I’d dump Purplebricks Group plc for this small-cap.”

Oxford Instruments  (LSE: OXIG) featured in that article alongside estate agent Purplebricks Group. OXIG produces“high-technology” products and systems for industry and research. Today, it released its full-year results report.

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Things are going well

Luckily for me, Purplebricks share price has fallen around 66% since my previous article and Oxford Instruments has risen 22%. Today, I’d still buy its shares and with the stock looking perky this morning, my guess is I’m not alone.

Today’s report reveals that things are going well. Currency adjusted revenue rose almost 11% compared to a year earlier, cash from continuing operations jumped up nearly 69% to just over £56m, and adjusted earnings per share lifted a little higher than 15%. The directors confirmed their confidence in the outlook by slapping 8.3% on the total dividend for the year.

Currency adjusted order inflow for the year scored an increase of 12% to more than £353m, which pushed the order book around 9.4% higher to almost £172m, providing decent forward visibility. There was a bit of currency headwind during the year, but the operating margin still came in at almost 15%, down just under 1%.

The work is profitable, and to prove the point “good” cash generation allowed the company to turn net debt of £19.7m on the year-ago balance sheet to net cash of £6.7m with this balance sheet made up to 31 March. I reckon cash is the acid test of business success, so I find the firm’s cash performance to be encouraging.

Long-term fundamental growth drivers

My observation is that some research-driven university spin-offs remain profitless always, and can be disaster-investments for their shareholders. That’s not the case with Oxford Instruments. Chief executive Ian Barkshire explained in today’s report that the firm serves “attractive markets with long-term fundamental growth drivers.” 

The company’s strategy involves focusing on segments where it can “maintain leadership positions.” 

Looking forward, Barkshire is “mindful” of geopolitical and market uncertainty, but the company is focused on improving the business.” He expects further progress” during the current trading year.

Meanwhile, City analysts following the company have pencilled in mid-single-digit percentage increases in earnings for the current trading year and for the year to March 2021.

With the shares close to 1,152p, you can pick up a few on a forward-looking price-to-earnings multiple of around 17 for next year. The anticipated dividend yield is running near 1.3%, with the cover from earnings likely to be around four and a half times.

High cover like that suggests to me the directors see plenty of growth potential still in the tank. I admit the valuation is punchy, but I like this one and would be happy to top up with a few shares on dips and down-days.

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Kevin Godbold has no position in any share 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.

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 considered, so you should consider taking independent financial advice.

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