While everyone buys big-cap stock market shares like Rolls-Royce and Relx, I’m seeking out low-cap hidden gems that I believe have growth potential. Three smaller companies that caught my eye lately are Endeavour Mining (LSE:EDV), Beazley Group (LSE:BEZ), and Airtel Africa (LSE:AAF).
Airtel Africa
With shares trading 41% below their estimated fair value, Airtel Africa is a low-cap FTSE 100 company that caught my eye. Headquartered in London, the £4.9bn business provides telecommunications services to 14 African countries, including Kenya, Nigeria, and Tanzania. It did well through 2023, up almost 10% in the past year.
Despite this, Airtel Africa’s profit margins decreased significantly, dropping from 12.8% to 5.8% this year. It also has an unstable dividend track record and a high debt-to-equity ratio (77.4%) that’s not covered by short-term assets.
So what makes me think it’s a hidden gem?
Earnings are forecast to grow 32% per year, which is impressive considering annual earnings for the wireless telecoms industry are expected to be negative. Return on equity (ROE) is another good metric to evaluate future performance, calculated by dividing net profit by shareholders’ equity. Airtel Africa’s future ROE is calculated to be 19.7% – higher than the industry average of 7.8%.
Endeavour Mining
Endeavour Mining is one of the top gold producers in the world, operating mines in Côte d’Ivoire, Burkina Faso, and Senegal. Like many FTSE-listed companies, it struggled through 2023, down 25% over 12 months.
The termination of CEO Sébastien de Montessus earlier this month knocked 10% off the share price. Investigations are ongoing into allegations of an irregular payment and misconduct with colleagues.
At only 4.3%, Endeavour Mining’s dividend yield is below the industry average of 7%. What’s more, dividend payments have been volatile over the past year and aren’t well covered by earnings or cash flow. On top of this, insiders have been selling more than buying lately.
So why am I considering this stock?
With a new CEO at the helm, I think Endeavour could turn its position around. Overall, analysis is positive, with forecasters predicting annual earnings growth of 55%. Some estimate Endeavour Mining to be trading at 50% below its fair value, with an earnings per share (EPS) growth rate of 69%.
Beazley Group
Beazley Group has the lowest market cap on the FTSE 100. It could even fall off the index if its valuation keeps dropping. The insurance company lost 20% off its share price in 2023, with profit margins that are now three times lower than they were last year. Add to that an unstable track record of dividend payments and Beazley doesn’t seem very enticing at first.
However, with a price estimated to be 78% below fair value, I think Beazley shares could be selling at a bargain. With a price-to-earnings (P/E) ratio slightly higher than it should be, I might wait to see if the price falls even further before I buy.
Sentiment regarding Beazley’s long-term prospects appears positive to me. Earnings are forecast to grow at 21% per year, with the share price estimated to increase by 50%. Using a discounted cash flow model, analysts predict the £5 shares would be more fairly priced at £23. Sounds like a promising growth stock to me.
