For many, the lure of speculative, fast-moving tech or oil and gas stocks can be overwhelming. Based on share price performance however, investors could do just as well buying slices of companies that provide routine — some would say mundane — services with fairly predictable earnings. Here are just two examples from the small-cap world.
Strong profit growth
£478m cap office services provider Restore (LSE: RST) has two divisions: Document Management and Relocation. As it sounds, the former is mostly concerned with providing both physical and cloud storage for important papers and evidence. The latter helps businesses of all sizes in moving IT systems while also providing data destruction and hardware disposal services.
If what the company does has you reaching for a pillow, the performance of its shares since last May should jolt you awake. In 12 months, shares in Restore have climbed 34%. Go back even further and since the aftermath of the financial crisis, they’ve returned more than 2,100% in capital gains alone.
March’s full-year results made reference to group revenue increasing 41% to just over £129.4m with group adjusted operating profit before tax rising by the same percentage to £23m.
Broken down, performance at Document Management was particularly strong with revenue jumping 65% and adjusted operating profit up 46%. Going forward, the recent acquisition and integration of PHS Data Solutions should help generate healthy returns for the scanning and shredding elements of this division.
Although not quite as impressive, market-leading Relocation still managed to grow revenues by 6% and adjusted operating profits by 17%.
On 20 times 2017 earnings, Restore’s shares may not be cheap but I think this might be a price worth paying for such a reassuringly stable company. Although a yield of just under 1.2% is fairly negligible, it’s worth mentioning that the dividend was hiked by 25% last year — a clear sign of confidence.
With analysts predicting this year’s net profit to be over four times what it was in 2015, I think Restore still offers considerable upside.
Significant progress
Textile rental firm, Johnson Service Group (LSE: JSG) gives investors another chance to benefit from a fairly dull but profitable niche.
In 2016, Johnson’s revenue grew 36.4% to £256.7m with adjusted profits before tax coming in at £33.8m — just over 45% higher than in 2015. While some of the latter can be attributed to organic growth, the company’s bottom line also benefitted from strategic acquisitions in the hotel linen rental market which were “immediately earnings enhancing”.
Last Thursday’s AGM statement reflected that the business remains “on track” to meet management expectations for the year while reiterating that January’s disposal of its underperforming retail dry cleaning business now allows Johnson to focus on expanding its higher-margin textile rental operation.
Given recent numbers and outlook, it’s unsurprising that shares in the £487m cap have become more popular. They’re up 43% since May last year.
Any drawbacks? Well, Johnson did have £99m of debt on its books at the end of 2016 (compared to £20.6m net profit). A yield of 2% will also be of little interest to income investors, even if dividends have been subject to consistent double-digit hikes over the last six years (including 19% last year).
That said, at 17 times earnings for 2017 — assuming 31% growth is achieved — Johnson Service Group still looks reasonably valued and should appeal to those who, while attracted to smaller companies, still prefer those offering relatively low capital risk.
