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Why I’m considering buying this UK micro-cap growth stock

Smaller companies can have a hard time competing for investors’ money. It’s often said that their futures may be more uncertain – they’re usually younger and less stable than their larger peers.  However, for an enterprising investor with a diversified portfolio and a taste for strong company fundamentals, I believe micro-cap Quartix Holdings (LSE: QTX) could be a great long-term growth stock pick.

An expanding market

With a market value of £195m at the time of writing, Quartix is a UK-based supplier of integrated tracking and telematics data analysis solutions for commercial fleets and motor insurance providers. With the global market for these systems predicted to grow at 18.9% between 2018 and 2024 – thanks to development of smart logistics and intelligent transportation systems – Quartix has a probable expanding customer base.

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Good cashflow

A current ratio of 1.12 is slightly lower than some investors would like. However, over half the company’s capital on-hand is cash – and only 10% inventory – meaning it can pay its way quickly and easily. In addition, and unusually for a technology micro-cap, Quartix has negligible long-term debt, freeing up cash for investing or dividends.

Notably, Quartix includes money spent on upgrading its fleet business in its sales costs. An accounting technicality perhaps but one that could lower the company’s expected earnings and increase the price-to-earnings (P/E) ratio.

Repositioning for growth

At 31.3 the P/E ratio is lower than the software industry average of 32.2, suggesting that Quartix may underperform its peers. However, during the first half of 2019, the additional investment in marketing and distribution has grown the subscription base by 12% and the overall fleet business market revenues by 11%. 

These gains, though, have been offset by declining insurance business revenues but Quartix is keen to stress the refocussing of the company on fleet operations; only considering the cash-generating insurance business that properly values its offerings. The likely lower earnings for 2019 could put a small dent in the previous five years’ average 10% earnings growth.

Increasing share price…but not assets

Quartix experienced a recent rapid increase in share price – indicating high demand for the stock and further inflating the P/E ratio.  The prior five years have seen Quartix delivering a 163% shareholder return, compared with an industry average of 29.6%, and its return on capital employed, at 46.24p, is impressive.

However, the current stock price could be too high: net tangible assets per share was 1.77 at 268p per share, but the current higher share price of 407p will deflate this figure significantly.

The share price increase also dampens the prospect of an average 3.1% dividend yield since 2015, but a dividend growth rate of 33% for this period is not to be sniffed at. Neither is the dividend policy of approximately 50% operating cashflow. The cash pay-out ratio of 46% signals the dividend is well covered by cash generated within the business.

As an apparently well-run micro-cap in a growth market, Quartix has much potential. But at its current size, it maybe be too pricey for some.

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Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has recommended Quartix. 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.