If you’re looking to boost your investment returns, it can pay to look outside the FTSE 100 index. Whereas many FTSE 100 companies are struggling for growth right now, there are plenty of smaller companies in the UK growing at a spectacular speed and generating huge gains for shareholders in the process.
With that in mind, I’d like to highlight an under-the-radar small-cap stock that’s outperforming the leading index by a wide margin at the moment. Having registered a share price gain of nearly 300% since its Initial Public Offering (IPO) in April 2017, it’s been a fantastic investment for long-term holders. However, I think there could be plenty more gains to come.
The company I’m referring to is Alpha FX (LSE: AFX), which specialises in FX hedging services for small- and medium-sized corporate clients. With a market capitalisation of around £270m, this is a small company. However, don’t let that put you off – it’s growing at a rapid rate, having increased revenues at a compound annual growth rate (CAGR) of an incredible 66% over the last three years.
Strong half-year results
Today, the company has released its half-year results for the six-month period ended 30 June, and the numbers are very impressive. Boosted by a 17% increase in client numbers, revenue for the period surged 60% to £15.6m, while underlying profit jumped 70% to £6.7m, and underlying earnings per share increased 49% to 14p.
CEO Morgan Tillbrook commented: “I am pleased to report all aspects of the business are performing well,” and he also noted trading in the second half of the year “has begun well.” These half-year results suggest the group has plenty of momentum right now.
Aside from the company’s prolific growth, there’s a lot I like about Alpha. For a start, it’s an extremely profitable company. Over the last three years, operating margin has averaged 45%, while return on capital employed (ROCE) has averaged 40%. Secondly, the company has a strong balance sheet, with no debt. Thirdly, Alpha already pays a small dividend which, to my mind, is the sign of a high-quality small-cap company. Finally, AFX is still very much under the radar, as there’s only one broker, Liberum, covering the stock (it’s rated as a ‘strong buy’).
Turning to the valuation, Alpha looks expensive at first glance as Liberum has pencilled in earnings of 24.3p per share for the full-year, which puts the stock on a P/E ratio of 31.3. However, that earnings forecast looks too low, to my mind. Given that half-year earnings came in at 14p per share, I wouldn’t be surprised to see Alpha generate full-year earnings of 27p-30p per share this year.
If we assume 20% earnings growth this year, we arrive at an earnings forecast of 27.2p per share, which equates to a P/E ratio of 27.9. Given the company’s high growth, that’s an attractive valuation, in my view.
Averaging out last year’s earnings growth of 30% and this year’s estimated growth rate of 20%, the P/E to growth (PEG) ratio is just over one, which suggests the stock is not expensive relative to its growth.
All things considered, I rate Alpha FX as a ‘buy’ right now. I think the stock has a lot of potential and I believe it could be a great long-term ISA investment.
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Edward Sheldon owns shares in Alpha FX. The Motley Fool UK has recommended Alpha FX. 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.