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Do Telecom plus PLC, Zoopla Property Group PLC & Chemring Group plc Have Stellar Growth Potential?

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Could shares in Telecom Plus (LSE: TEP) rise by 30%, even after this morning’s 5.5% gain?

The group confirmed today that it is “confident of achieving adjusted pre-tax profits of at least £54m” for the year which ended on 31 March. That’s 7% more than last year. Telecom Plus also confirmed that the total dividend for 2015/16 will be 46p, giving a yield of 5.3 per cent.

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Shares in Telecom Plus have fallen by 54% since peaking at 1,900p in 2014, but City brokers believe the stock is now undervalued. The average broker price target for Telecom Plus is 1,120p, which is around 30% more than today’s 870p share price.

However, today’s update also warned investors about the headwinds facing the firm. Utilities are offering more competitive fixed-price plans than previously, undercutting Telecom Plus’s offerings. Group buying schemes are also putting pressure on Telecom Plus, as is the cost of funding the UK-wide rollout of smart meters.

In my view, there’s a risk that Telecom Plus will continue to feel the squeeze. Utilities may not want to pay Telecom Plus such generous commissions if they can sign up customers to multi-year contracts directly.

I intend to wait for the firm’s full-year results in June before making a call on this one.

Is now the time to buy defence?

Defence firm Chemring Group (LSE: CHG) has been working hard to recover from the three-year collapse in profits which led last year’s £80m rights issue. Today the group announced the appointment of a new chairman, Carl-Peter Forster.

Mr Forster spent his executive career in the automotive industry, ending up as Group Chief Executive of Tata Motors, including Jaguar Land Rover. JLR’s growth during the period of his leadership was impressive. Chemring shareholders will now be hoping Mr Forster can do the same for them.

I believe Chemring is starting to look like a recovery buy. Revenue during the three months to 31 January was 35% higher than during the same period last year. Chemring’s order book at the end of January was £593.8m, up from £569.6m one year ago.

The shares trade on 11 times forecast earnings, which doesn’t seem excessive. However, I’d like to see more evidence of debt reduction and earnings momentum before I decide to pull the trigger.

A profitable property play?

Shares in Zoopla Property Group (LSE: ZPLA) edged higher today, after the firm announced the £75m acquisition of The Property Software Group (PSG).

PSG provides software used by estate agents to manage their property inventories, marketing and communications. The group’s software is used in more than 8,000 estate agencies. Last year saw sales of £15.9m and adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £5.1m.

A key attraction is that PSG has a customer retention rate of 97% and that 84% of the group’s revenues are recurring. Clearly PSG’s software is seen as essential by most of its customers.

This acquisition should be a useful for Zoopla, but it does look quite expensive to me. Zoopla is paying 14.7 times adjusted EBITDA for PSG and will be borrowing £50m to fund the deal. Borrowing money to buy extra earnings like this can be successful, but isn’t always.

Zoopla shares now trade on a 2016 forecast P/E of 26. In my view, that’s probably high enough.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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