Shares in technical services provider Keywords Studios (LSE: KWS) and AIM-listed peer Smart Metering Systems (LSE: SMS) have powered higher over the last 12 months. While clearly expensive, I think both stocks are still worthy of consideration by growth-focused investors.
Play the game
2016 was quite a year for holders of Keywords stock. Rising well over 200% since last April, its shares now trade for 782p. Based on last week’s full year results, the company’s acquisition-friendly strategy, more recent trading and future prospects for the video gaming industry, I think there could be even more to come.
For the year to 31 December, group revenue — which included the impact of eight acquisitions — increased by 67% to €96.6m. Adjusted profit before tax rocketed by 86% to €14.9m with net cash flow more than quadrupling to €15m. Now boasting 27 studios around the world, there was also a 25% rise in clients (from 51 to 64) using three or more of the company’s six services.
Clearly, such good numbers mean that prospective investors must pay a premium for the shares. Right now, Keywords trades on 34 times forecast earnings for 2017. While that might seem seriously high (and a brief period of profit-taking is likely after such a stellar run), the company’s clear growth trajectory means I’m inclined to think that this could still be a price worth paying.
In addition to recent trading being in line with management expectations, a revolving credit facility has now been agreed with Barclays, allowing the company to continue its acquisition spree. Indeed, in February, Keywords added visual effects and motion graphics agency, SPOV, to its portfolio. With this likely to be the first of several purchases over the year, you wouldn’t bet against the firm meeting analysts’ estimates of a 99% rise in earnings per share in 2017.
Factor-in a history of generating decent returns on capital, a €8.7m net cash position and its market-leading status in an industry showing no signs of slowing down and Keywords comes across as a perfect buy-and-hold investment.
The smart choice?
Recent full-year results from £530m cap Smart Metering Systems were just as impressive.
Continued growth across all business areas led to a 25% jump in revenue (to £67.2m) in 2016. Total gas and electricity metering and data assets increased to just over 1.25m at the end of 2016, allowing total annualised recurring income to rise by 19% to £41.3m. While its gas meters still generate a substantial proportion of this income (£31.5m), it’s positive to note the 125% rise in electricity meter recurring rent (to £2.9m) and total electricity portfolio increase of 166% to 77,000.
Staying with the numbers, gross profit increased by 23% to £36.9m with underlying profit before tax coming in at 19.6m – an increase of 13% on the previous year. In addition to signalling a “strong start” to 2017, CEO Alan Foy also reflected that the company was “well positioned” to continue making progress in its core markets.
With a price-to-earnings ratio (P/E) of 26, shares in SMS are hardly cheap. However, the Goverment’s desire to have gas and electricity smart utility meters in every UK home by 2020 should keep investors hungry for the stock. Following the completion of three strategic acquisitions in 2016 (CH4, Trojan and Qton), SMS appears to be in a strong position to meet this demand along with the 27% earnings per share growth currently expected by analysts in 2017.
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Paul Summers owns shares in Keywords Studios. The Motley Fool UK has recommended Keywords Studios and Smart Metering Systems. 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.