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Forget Sirius Minerals! I’d buy this already profitable stock for its potential

Sirius Minerals is still trying to find funding to complete its polyhalite mine and infrastructure project. Meanwhile, the firm has slowed development work to allow for a six-month strategic review period funded by existing cash resources.

The clock is ticking and the eventual outcome is uncertain. I see the stock as risky and would rather invest in Tekmar (LSE: TGP), which is a profitable, fast-growing enterprise that appears to be breaking out into a period of solid operational momentum.

New to the market and keen

The company designs subsea protection equipment for power cables linked to wind farms and oil platforms. After growing under the umbrella of private equity for around a decade, the company burst onto the stock exchange with its IPO during 2018.

And the recent listing is a positive, for me. It can be a good time to latch on to a growth company when it’s newly listed because it can be small enough to expand fast, well capitalised, and packed with enthusiastic and driven managers keen to make their marks.

I find today’s half-year results report encouraging. Compared to the equivalent period last year, revenue rose almost 41%, and adjusted earnings per share swung from a loss last year of 4p to a profit of 2.2p. Tekmar pays no dividend, but that’s not uncommon for smaller firms with a growth agenda because cash inflow is often ploughed back into the business to finance expansion.

The firm’s been winning business, and the order book is more than 23% higher year on year, “with several contract-wins across divisions throughout the period.” There were “strong” results from two companies the firm acquired during the period – Subsea Innovation and Ryder Geotechnical – which are part of Tekmar’s diversification strategy. Meanwhile, the company is free of debt and reported a cash balance of £3.9m.

A positive outlook

Looking ahead, the directors said in the report the company is “firmly” on track to meet market expectations for the current trading year to March 2020. City analysts following the firm expect earnings to increase by a robust double-digit percentage with a further double-digit improvement the year after that. Meanwhile, the directors reckon the split of revenue will remain at around 60% from offshore wind operations and 40% from subsea.

In October, after the period ended, Tekmar acquired Pipeshield International, which added around £45m to the enquiry book. Chief executive James Ritchie said in the report the directors are “confident” about the future success of the business because of the order book and the “long-term positive global outlook for offshore wind and stability in the oil and gas market.” 

Tekmar appears to be comfortably financed and trading well within an industry with a tailwind. Meanwhile, with the share price close to 158p, we can pick up a few of the shares on a forward-looking earnings multiple for the trading year to March 2021 of just below 14. And I’d much rather take my chances with Tekmar than with Sirius minerals right now.

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Kevin Godbold has no position in any share 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.