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Can these small-cap shares provide a strong source of growth?

While the FTSE 100 has risen to an all-time high in 2017, a number of mid-cap and small-cap companies could still offer relatively low valuations. Certainly, share prices are now generally higher than they were at the start of the year. But given that growth prospects may still be bright in a number of cases, there could be many investment opportunities available at the present time. With that in mind, here are two small-caps which could be worth a closer look.

Surprise results

Reporting on Wednesday was low cost multi-currency payments service FairFX (LSE: FFX). The company released a half-year trading statement which was better than expectations. It achieved its first interim net profit since IPO. Turnover for the first half of the year was up 25.8% year on year, with the company experiencing broad-based growth. Gross margin moved higher thanks to a more profitable business mix, while the cost benefits of rationalising the supply chain led to a more profitable period.

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Total turnover from pre-paid cards and international payments increased 23% and 25% respectively. The company’s strategy on the retail card and travel money side is to improve the user experience. Thus far, it seems to be making progress in this regard, while campaigns to increase customer retention and cross-selling opportunities have been launched.

Looking ahead, FairFX is expected to report a net profit in the current year. It is forecast to deliver growth in earnings of over 600% next year, which indicates that it is moving in the right direction. This puts it on a forward price-to-earnings (P/E) ratio of 14, which suggests it offers excellent value for money given its long-term growth potential.

Potent combination

Also offering an attractive outlook for investors within the payment services sector is Safecharge (LSE: SCH). It is forecast to post a rise in earnings of 17% in the current year, followed by further growth of 14% next year. Despite this, it trades on a PEG ratio of just one, which indicates that its shares could deliver outperformance of the wider index over the medium term.

As well as growth potential, Safecharge also offers enticing income prospects. They could prove to be a catalyst on its valuation, since inflation is forecast to move higher than 3% over the coming months. As such, stocks offering high yields may become more popular among investors. With the company currently yielding 5.2% from a dividend which is expected to increase by 15% next year, it offers significantly better income prospects than many of its industry and index peers.

Of course, management changes at the company could increase its risk profile. However, with a sound strategy and a replacement CFO having been announced, it looks set to deliver on its growth potential. This could make it a worthwhile and profitable purchase for the long term.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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