Growth sputters? You should really read this.
I ran a search for UK companies, a) with a market cap greater than £100m, b) whose adjusted operating cash flow has grown between 70% and 100% in the last year, and c) whose revenue growth was above 20% in the last year.
At least a couple of names may deserve attention now and in months to come.
Central Asia Metals
Stocks of large metal and mining companies have been out of favour for some time, but what about Central Asia Metals (LSE: CAML)?
With a market cap of £173m, this is the smallest entity I have identified. A diversified metals and mining company, CAML is listed on the AIM and is based in London. Its stock has risen 16% this year and 35% in the last 12 months. In the last three years, it has outperformed the FTSE 100 by 74 percentage points, excluding dividends.
CAML’s operating profit turned positive for the first time in 2012, and doubled in 2013. Return on assets and return on equity have risen steadily, while its the balance sheet is debt-free. CAML’s operating margin is impressive, and estimates for revenue growth are decent. Still, proper due diligence should be performed on its asset base and its management team. Its free float is only 62.6% of the total shares outstanding. Dilution risk is real because such businesses tend to have very limited funding options at this stage of maturity.
With a market cap of £202m, Vertu (LSE: VTU) ranks just above CAML in terms of size. A retailer in the automotive industry, Vertu is listed on the AIM and is based in Gateshead. Its stock has risen 6% this year and 46% in the last 12 months. In the last three years, it has outperformed the FTSE 100 by 53 percentage points, excluding dividends.
As one would expect, its operating profitability is extremely low — it ranged between 0.7% and 1.1% over the last five years – but Vertu has constantly grown revenue over time and is expected to hit £2bn by 2016. Its £1.6bn trailing sales double the turnover it reported in 2010. It boasts a net cash position of about £30m, which signals a relatively strong balance sheet.
In 2013, inventories rose above historic trends and impacted operating cash flow to the tune of £70m, but Vertu’s track record provides a clear indication that inventories are properly converted into sales – and that also shows in the cash flow conversion cycle of the company. Moreover, operating cash flow stood at its highest level on record last year, in spite of a significant rise in inventory, which may back future growth.
OPG Power Ventures / The Law Debenture Corporation
OPG (LSE: OPG) owns and runs power projects in India. It has a market cap of £381m and is listed on the AIM. Corporate governance could be an issue, while high leverage doesn’t bode well with value creation. Its stock has risen 87% this year and 64% in the last 12 months. In the last three years, it has outperformed the FTSE 100 by 13 percentage points, excluding dividends. It’s a high-risk/uncertain-return investment.
Let’s move on to our last candidate, The Law Debenture Corporation (LSE: LWDB), a London-based investment trust and fiduciary services business with a market cap of £621m. I wouldn’t touch it because the value of its assets base can be extremely volatile and there are more valuable options around.
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Alessandro does not own shares in any of the companies mentioned.