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I think this stock has better growth prospects than Sirius Minerals

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When I looked at Sirius Minerals (LSE: SXX) back in May, I expressed some concerns about the miner. I can understand investor excitement around the potential for the unique organic fertiliser called polyhalite that the miner is looking to extract and sell globally. But on the other hand, ongoing fundraising and question marks over just how much demand there really is for polyhalite are an ongoing cause for concern.

Drilling down

The recent launch of a $500m high-yield bond to help fund the development of its Woodsmith fertiliser mine does little to alleviate my concerns, even if it does mean current shareholders aren’t tapped for more money. But further road bumps could well see shareholders asked to cough up more cash — there are simply no guarantees. 

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More deals for polyhalite in the coming months would certainly be welcome and if that happens then it’s likely the share price, which has more than halved in the last year, will receive a much-needed boost. For a speculative investment, positive news flow is essential as the company looks to make good on its promises. The share price though could fall further without an injection of optimism.

Heading up

Sanne Group (LSE: SNN), a provider of alternative asset and corporate services, looks in my view to have a much better investment case. Its growth in the last year leads me to believe that it has far better growth prospects over the next 12 months.

In the year to the end of December 2018, underlying pre-tax profit rose 11.8% to £42.6m on revenue of £143m, up 26.4% from 2017. The business performed well in both EMEA and the US. This meant the dividend was moved up for the year from 12.6p to 13.8p.

The opportunity

The upside comes from the fact that it’s committed to growth. It’s looking to develop market share, expanding the services and assets it advises on, expanding its global network and acquiring competitors to achieve growth when appropriate. This adds up to a comprehensive plan to add value for shareholders.

To date, growth has been rapid. From April 2015 to 1 January 2019 the company grew from around 270 employees to over 1,400 and revenues went from £35m to £143m.

With Sanne operating in highly regulated financial markets, there are barriers to entry and it has established long-term relationships with clients such as asset managers, which means it has a high level of recurring revenues. The business model also creates strong margins, the operating profit margin is 31%, and this makes the business very cash generative. The result of this is that the finance company should fare better than more cyclical and lower-margin businesses if the economy gets worse. 

The outlook for Sanne I think looks very good over the next 12 months, despite Brexit, trade wars and wider economic concerns. The business is highly profitable with opportunities and a strategy to grow and this should serve shareholders well, despite the P/E being nearly 30. The dividend cover of 1.74 should mean the dividend can keep rising from its admittedly currently low starting point of 1.8%, which should please investors.

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Andy Ross 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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