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Hurricane Energy plc isn’t the only small-cap with huge potential

In a trading update today, chief executive Richard Tyson said he’s “excited about the prospects” for TT Electronics (LSE: TTG). I have to say I am too, as I see huge potential for investors in this global provider of engineered electronics for performance critical applications.

Evolve and prosper

The company completed the sale of the largest of its four divisions last month. Following the disposal, as management rightly says, “TT will be a higher margin, higher quality business, more balanced across markets and geographies and with increased financial capacity to accelerate growth through capital investments and acquisitions.”

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In today’s update, it reported “strong growth” in the continuing businesses, with like-for-like revenue up 6% and the order book across all three divisions continuing to be “strongly ahead” of the prior year. Despite the loss of the disposed division’s revenue and profit, I calculate little change in group earnings, assuming an elimination of finance costs (the company has moved to a net cash position) and lower tax (due to the change in geographical mix).

TT’s share price is little moved following today’s update and at 216p this FTSE SmallCap firm is valued at £350m. With net cash of over £50m, I put its cash-adjusted forward earnings multiple at around 15 and see the stock as very buyable at the current level.

Exciting oil play

Another stock I see as having huge potential is AIM-listed Hurricane Energy (LSE: HUR), which has a market cap of £524m at a current share price of 26.75p. This oil play has 37m barrels of 2P reserves at its Lancaster field and 760-786m barrels of 2C contingent resources across all its fields/prospects — and there’s potential for these numbers to increase by a large amount.

Impressively, for an AIM oiler with no currently producing assets, Hurricane has retained 100% ownership of its licences. This has meant rounds of dilution for shareholders, the latest being a $520m fundraising in June, which included $300m ordinary shares at 32p and the remainder in convertible bonds.

However, retaining full ownership of its licences will reap bigger rewards in the longer term and, for new investors, I believe now could be a great time to buy a slice of the business. The reason is because the fundraising means Hurricane is funded for an Early Production System at its Lancaster field, for which its was given consent in September. First oil is targeted for H1 2019 and planned production is 17,000 barrels a day. This would provide revenue to fund the move to full production. So, if all goes to plan, new investors today shouldn’t experience the level of dilution seen in the past.

Some commentators are deeply sceptical about this. But with Hurricane having the potential to become a major player in the West of Shetland region and also now looking to move from London’s junior AIM market to a premium listing, the risk/reward proposition here leads me to rate the stock a ‘buy’.

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G A Chester has no position in any of the 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.