When it comes to finding UK shares with strong growth prospects I think there are still plenty of shares with potential. These two UK shares have a lot to offer, in my opinion.
One of the top UK shares for growth?
Kainos (LSE: KNOS) is a high-quality technology company. Its share price has done very well in recent years. It’s up around 320% in just three years. Over 12 months, the shares have doubled.
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Kainos helps businesses to digitally transform. This means helping businesses move onto the cloud to save costs, to give just one example. There should be a lot of demand for this kind of service for a long time to come.
The business has done very well in the last half-decade. Revenues have gone from £76.6m in 2016 to £179m in 2020. That’s fantastic top-line growth.
An update from Kainos back in May showed that it was continuing to do well. Pre-tax profit for the year to the end of March rose 117% to £50.3m. And I don’t see any evidence that the spectacular growth won’t continue. Indeed, according to Stockopedia, revenues are expected to reach £287m in 2023.
Returns on capital, margins and cash flow all also strike me as being really strong. For example, the return on capital employed is 55, which is very high. That bodes well for the future and suggests to me that Kainos is a quality business.
The big problem comes with the fact this quality and growth hasn’t gone unnoticed. As with many fast-growth tech stocks, the biggest risk is in the valuation of the shares. They trade on a forward P/E of 44. Even for a tech stock that’s quite high.
It means any slowdown in growth will likely see the share price hit hard. That said, I’d potentially add Kainos shares on any dip. A P/E in the 30s would put it at a similar level to other tech stocks and reduce the valuation risk.
Another share that should grow strongly
Shares in Liontrust Asset Management (LSE: LIO) have significant momentum. The shares are up 30% in just the last three months. Over the last 12 months, they’re up over 60%.
For me though, the short-term performance isn’t that important. It’s certainly not what makes me like the shares, especially as it has made them more expensive. At the end of the day, I like the company for its long-term potential.
Its performance in recent years shows me it’s a good business. Revenue has gone from £45m in 2016 to £175m in 2021. Operating profit over the same timeframe went from £9.39m to £35m – so it more than tripled.
It’s forecast that revenue will get to £251m in 2023. That’s quite an incredible jump for an asset manager that’s not that expensive to buy – in my opinion. It trades on a forward P/E of around 18. By comparison, Tatton Asset Management – which is smaller – trades on a P/E nearer 30.
As an asset manager, Liontrust is asset-light, has high margins and low debt. This is common in the industry and I think Liontrust is a good player.
The risk is if key fund managers leave. A lot of the value of a company like this is in its people. Also, if funds underperform, the company could see outflows from investors, which would hit its profits. Overall though, Liontrust has qualities that tempt me.