Looking ahead, there could be further outperformance. The company appears to have a solid position within its key markets, while its strategy seems to be sound. Alongside another growth stock that released an update on Monday, Diageo could offer investment appeal over the long run.

Profit growth potential

The other company in question is supplier of complementary software and managed services Castleton Technology (LSE: CTP). Its trading update for the 2019 financial year showed results are expected to be in line with previous guidance. Revenue is expected to be at least £26.3m, while adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) is due to be at least £6.3m. This represents encouraging organic growth, with the company also expected to have reduced net debt versus the previous year.

Castleton Technology is forecast to post a rise in earnings of 16% in the current year. This suggests recent acquisitions, as well as organic growth, are helping to improve its financial performance. Even though it has a bright financial future, the stock trades on a price-to-earnings growth (PEG) ratio of just 1.1, which suggests it may offer growth at a reasonable price. While its a relatively risky smaller company, it could be worth a closer look for long-term investors.

Improving outlook

As mentioned, the prospects for Diageo continue to be relatively upbeat. The company remains popular among investors even though it has a high valuation compared to many of its FTSE 100 index peers. For example, it currently trades on a price-to-earnings (P/E) ratio of around 25, which suggests its margin of safety may be relatively narrow.

However, with Diageo enjoying significant size and scale, it may not require a wide margin of safety in order to merit investment. The company appears to have a strong growth outlook, with a rationalisation of its asset base potentially allowing it to invest more heavily in its core brands. This may strengthen its competitive position at a time when the growth potential in emerging markets is high.

Although consumer goods stocks such as Diageo have generally enjoyed a strong decade of performance since the financial crisis, that trend could continue over the long run. The growth prospects for major emerging economies such as China and India are high, with wealth and wage levels forecast to increase significantly over the next few years. With the company having a strong position in such markets, as well as many others across the developing world, it could enjoy a continued period of improving share price performance relative to the wider FTSE 100.

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The second company is a business whose shares haven’t moved much over the last year, but which has just reported an 11% increase in half-year sales.

Which of these stocks makes most sense for growth investors?

Improving outlook

The second company I mentioned above is Castleton Technology (LSE: CTP). This is a Cambridge-based technology group which provides software for the social housing sector. Formerly known as Redstone, Castleton has a market cap of about £45m.

The company published its half-year results this morning. Sales for the six months to 30 September rose by 10.9% to £10.8m, while the group’s operating profit for the period rose by 50% to £353,000.

This improved performance was also reflected in the group’s cash generation. My calculations suggest that free cash flow, after costs relating to earlier acquisitions, was £1.1m. This cash helped to reduce the firm’s net debt to £8.0m, down from £9.7m at the end of March.

My view

Today’s figures suggest to me that Castleton is on track to hit broker forecasts for sales of £22.7m this year, with adjusted earnings of 4.86p per share. At 62p, this gives the stock a forecast P/E of 12.8.

An alternative approach is to value the stock on free cash flow. I estimate that Castleton has generated about £2.8m over the last 12 months. That gives the shares a trailing P/FCF ratio of around 16.5.

This valuation seems about right to me. So while this business seems to have potential, I’d need to do further research before making an investment decision.

Time to take profits?

UK Oil & Gas Investments (LSE: UKOG) recently confirmed that it’s been given planning permission for a further round of flow testing on the Horse Hill-1 (HH-1) well.

If the results are positive, then this could be good news for shareholders. But I think it’s important to focus on the financial picture, as well as the operational situation.

The group had a cash balance of just £1.1m at the end of March. But during the six months to 31 March, UKOG reported cash outflows of more than £1.4m.

Given the firm’s activities over the last seven months, I think it’s fair to assume that this cash balance will now be quite low. I think there’s a strong chance UKOG will have to raise some fresh cash through another dilutive share placing, probably at a discount to the current price of 5p.

Major investor selling

Back in January, French oil firm SCDM Energy Ltd acquired a 3% stake in UKOG. In July, this rose to 5%.

However, SCDM sold heavily in October. Its last reported stake was just 2.55%, below the level at which disclosure is required. So the remaining shares may now also have been sold.

UKOG shares were trading at about 1.5p in January. As they were above 5p in October, SCDM has probably made a healthy profit. But why would this expert investor decide to start selling directly before the Horse Hill flow tests are due to start?

In my view, the most likely explanation is that SCDM believes UKOG’s market cap of £177m is already high enough, given the unproven quality of its assets.

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Roland Head 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.

The software and managed services provider announced that organic revenues rose by around 10% in the six months ending September, meaning that the board’s full-year profits forecasts remain in line with expectations.

Castleton also advised that strong cash generation had seen net debt continue to fall. This clocked in at £7.9m as of the end of last month, down from £9.4m at the close of March.

The result led company chairman David Payne to comment: “Our financial performance, along with a number of significant milestones previously reported to the market, including the delivery of the integrated product suite, is particularly pleasing.” He added: “This demonstrates the capability of the group to deliver on its strategy and increase our share in our chosen markets.”

Fiery forecasts

Having flipped into the black in the year ending March 2017, the City expects profits to boom at Castleton going forward. Earnings of 4.9p per share are forecast for the current year, up from 0.59p last year, and these are predicted to rise to 5.3p in fiscal 2019.

In an added sweetener, current projections suggest that the Cambridge-based business is very attractively priced at the moment – it carries a forward P/E ratio of 12.9 times, comfortably beneath the widely-accepted value watermark of 15 times.

With Castleton continuing to stack up significant multi-year contracts with non-profit and public sector clients, and doubling-down on efforts to expand its customer base (it now has more than 750 clients on its books), I reckon City forecasts could continue to impress beyond the medium term.

Sales stamping higher

I am certainly convinced by the earnings outlook over at JD Sports Fashion (LSE: JD) as the retailer’s successful expansion scheme shows no signs of running out of steam.

The so-called ‘King Of Trainers’ saw sales jump 33% in the six months to July, to £1.37bn, another half-year record. And the Bury-based company is not done yet in refining and boosting its international expansion strategy.

Last month, it agreed to combine its operations on the Iberian peninsula with those of Sport Zone, a move that will create the second-biggest sports retailer across Spain and Portugal. And it also entered the South Korean marketplace in September, setting out on a joint venture following the purchase of a 15% stake in footwear retailer Hot-T for £5.5m (and which could rise to 35%).

JD Sports has proven it has what it takes to create a truly-formidable international retail brand. And with the company steadily building its multichannel proposition at home and abroad, the number crunchers are predicting earnings rises of 16% and 11% in the years to January 2018 and 2019, respectively.

I believe JD Sports is brilliant value based on these estimates. Indeed, I would consider the retailer a snip on its current forward P/E rating of 16.4 times, given the huge success of its ambitious growth strategy. But a PEG reading of 1, bang in line with the widely-regarded bargain watermark, really seals the deal for me. I reckon the sportswear star should generate eye-popping profits growth now and in the future.

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Royston Wild 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.

Castleton now boasts more than 750 customers, it advised, more than a third of which take out more than one product or service. The company signed a number of multi-year contracts during the period, including a 10-year deal with Clúid Housing Association in Ireland.

And the business has hit the ground running in the current year, chief executive Dean Dickinson commenting that “the new financial year has started in line with expectations, with a large, engaged customer base, a strong order pipeline and the right structure in place to maximise this significant market opportunity.” Castleton has inked two further multi-year deals since the close of the year, it advised.

Great value

Having flipped back into the black last year, City analysts expect further progress and have chalked in a 20% bottom-line advance for the current fiscal year.

And this projection makes Castleton stellar value for money. A forward P/E rating of 14.1 times falls below the widely-considered value benchmark of 15 times or below. A prospective PEG multiple of 0.7 — below a reading of 1 — also suggests the Cambridge firm could be too cheap to miss.

I reckon Castleton is worthy of serious consideration at these prices, particularly as recent acquisitions begin to bed in, and given its encouraging top-line momentum.

Profits powerhouse

McCarthy & Stone (LSE: MCS) is another stock tipped for great things on the earnings front.

Following last year’s modest 3% uptick, the City expects profits to detonate in the years ahead and have chalked in rises of 11% and 22% for the years to August 2017 and 2018 respectively. And it is not difficult to fathom why the number crunchers are so optimistic.

McCarthy & Stone chief executive Clive Fenton said this month: “The market for high-quality retirement housing remains strong notwithstanding any potential uncertainty as a result of the UK general election outcome.” He added that “the underlying housing market continues to be supported by low interest rates, good mortgage availability and low levels of unemployment.”

As a result, McCarthy & Stone affirmed its target of building and selling 3,000 units each year by the end of the decade.

While the business has seen sales slow more recently following the Conservatives’ ballot box disaster in June, the long-term outlook remains robust as Britain’s ageing population drives demand for retirement properties. And I reckon the prospect of any near-term turbulence is more than baked-in at current share prices.

Current forecasts leave McCarthy & Stone dealing on a mega-low forward P/E ratio of 11.1 times. And a PEG ratio bang on the bargain watermark of 1 times underlines its corking value relative to its projected earnings momentum.

Meanwhile, the firm’s brilliant bottom-line outlook, combined with its exceptional cash-generative qualities, is expected to keep launching dividends skywards. The 4.5p reward of fiscal 2016 is predicted to jog to 5.2p in 2017 and to 6.1p in 2018, driving a yield of 3% in the current period to 3.6% the next year.

I reckon McCarthy & Stone remains a compelling pick for long-term investors.

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Royston Wild 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.

Strong performance

Reporting on Thursday was utility service provider Telecom Plus (LSE: TEP). Its performance in the year to 31 March was encouraging and showed its current strategy seems to be working well. The company was able to deliver modest growth in customer and service numbers for the year, with an encouraging upward trend starting to emerge during the final quarter of the year.

This was despite strong headwinds persisting over the last few years and particularly present in first part of last year. As such, the company’s performance in difficult trading conditions indicates that it may have a relatively wide economic moat. Furthermore, its cash flow has remained strong and its successful launch of the Home Insurance division could positively catalyse earnings growth over the medium term.

Telecom Plus is expected to record a rise in its bottom line of 7% in the current year and is due to follow this with further growth of 9% next year. Although its shares trade on a relatively high price-to-earnings (P/E) ratio of 19.8, they seem to offer excellent value for money given the company’s performance track record. In the last five years, Telecom Plus has been able to record rising profitability in every year, which means that its risk/reward ratio may be favourable for the long run.

Growth at a reasonable price

Also offering upside potential over the medium term is software and managed services provider Castleton Technology (LSE: CTP). Although its shares have already risen 13% since the start of the year, they continue to trade on a relatively enticing valuation. For example, they have a P/E ratio of 16.8 and yet are forecast to record a rise in earnings of 20% in the next financial year. This puts them on a price-to-earnings growth (PEG) ratio of just 0.8, which indicates that more capital growth could lie ahead.

Clearly, 2017 could be a pivotal year for the company. It has been loss-making in each of the last four years and if it can return a black bottom line this year, its share price could rise. Investor sentiment may pick up in the short term in anticipation of its improving finances. And according to its most recent update, cash flow has been better than expected. This could help to reduce the company’s net debt, which may mean it offers an increasingly sustainable growth outlook.

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What’s more, since the beginning of 2014 Castleton’s shares have gained more than 400% as the company has gone from strength to strength. 

2016 is set to be yet another positive year for Castleton’s shareholders. Indeed, 2015 has been somewhat of a consolidation year for the group as management has completed four new bolt-on acquisitions to boost growth. Purchases include Keylogic Limited, Opus Information Technology Limited, Impact Applications Limited and Brixx Solutions Limited. 

Thanks to these acquisitions, in the space of just a few months, Castleton became the leading supplier of software and services to the social housing sector. Nearly a third of all the social housing associations in the UK are now Castleton customers and by looking at the company’s interim results release for the six months ended 30 September 2015, it’s clear how far the company has come over the past 12 months. 

Impressive results 

For the six months, Castleton reported sales of £8.5m, up 350% year-on-year and 16% on an organic basis. Adjusted earnings before interest, tax, amortisation and depreciation rose to £1.7m for the period, up from a loss of £0.1m as reported for the same period last year. 

Unfortunately, admin expenses ate up the majority of EBITDA and profit for the group remained elusive. However, Castleton did report a positive cash flow figure for the period, a more telling gauge of business growth. During the six months, Castleton generated £0.8m in cash from operations, 

Fifty five percent of the company’s revenue is recurring, which gives Castleton a predictable, stable income stream to support further growth. 

Based on Castleton’s impressive trading for the six months to the end of September, City analysts expect the company to report a pre-tax profit of £3.2m for the year to the end of March 2016. And based on the fact that Castleton has around 70m shares in issue (post consolidation) and after deducting 20% corporation tax from the pre-tax estimate, according to my figures the company is set to report earnings per share of 3.7p for the year. That means Castleton is trading at a forward P/E of 20.

City analysts are currently expecting the company’s earnings to expand by a further 18% during 2017, so this valuation seems appropriate considering Castleton’s aggressive growth. 

Balance sheet observations

High-growth small-caps like Castleton usually have weak balance sheets, which makes them unsuitable investments for all but the most risk-tolerant investors. Castleton doesn’t have the same problem. The company is generating cash and has been using stock as currency rather than debt to pay for acquisitions, helping keep the balance sheet clean. Net debt-to-equity was around 50% at the end of September. 

The bottom line

So overall, Castleton is growing rapidly, has a strong balance sheet and the company’s shares look to be good value. It could be a top pick for 2016.

The post Will 2016 Be The Year Castleton Technology PLC Turns A Profit? appeared first on The Motley Fool UK.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Dreamland?

Castleton Technology (LSE: CTE) is less likely to deliver that kind of performance than Churchill Mining (LSE: CHL), in my view, but its stock price could surely double, although a rally from 3p to 6p would put its valuation in the danger zone, based on fundamentals. 

I would probably stick with Sirius Minerals (LSE: SXX) at 18p a share if I were to bet on any company worth less than £500m right now. The downside, of course, is that you may end up being disappointed at the end of the process, particularly if you chose Churchill. 

Intangibles

Castleton’s stock price ranged between 0.92p and 3.61p over the last 52 weeks, and its stock currently trades at 3p (+42% year to date), which implies a market cap of £45m. 

Last week it reported a trading update for the year ended 31 March, which showed revenue at £6m and widening economic losses due to one-off charges. The market is pleased with its aggressive strategy — Castleton is mopping up assets — but the value of intangibles on its balance sheet is significant (at 73% of its total assets), while its stock is very expensive based on its price-to-tangible book value. 

Formerly Redstone, this software support services group could be a decent bet, but I’d not underestimate the risks associated to its strategy. Furthermore, stiff competition in the sector could limit short-term upside. 

Arbitration 

We know that Churchill’s equity value hinges on the outcome of the international arbitration cases that Churchill and its Australian subsidiary Planet Mining are pursuing against the Republic of Indonesia. The arbitration arises from the unlawful revocation of the mining licenses relating to the East Kutai Coal Project in East Kalimantan, in which Churchill and Planet held a 75% interest, Churchill insisted in its latest update. Its stock has halved since a record high in June, and its market cap now stands at £34m.

Churchill estimates that the damage can be quantified at about $1.3bn; consider that capital appreciation in the region of 1,000% from its current stock price of about 22p would yield a market cap of £320, or about $500m. That’s less than 50% of the value that Churchill claims it could fetch!

That said, the government of Indonesia is well known in the international community for playing hard ball in these situations, and I am not sure that we might still have an investment case if it simply decided not to pay or if proceeds were much lower than expected. 

Financing

Sirius is fairly priced right now, at least based on several elements that can hardly be quantified!

The biggest event that should emerge over the next six months should be the arrangement of a comprehensive financing package backing the development of its flagship York Potash project in York. 

There has not been big news to report recently, but latest signs are encouraging and point to an investment that could be properly priced right now — and one that could still be a bargain at over 40p a share if all pieces of its York project fall into place. 

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And if this trend continues, within six months Castleton’s shares could hit 5.6p, 93% above present levels. 

But is this a realistic expectation? Can the company maintain its lofty growth rate?

Organic growth 

Throughout much of the past year, Castleton has been going through a period of transition. 

During June of last year the company concluded the acquisition of Montal Holdings Limited, a well-respected provider of IT managed services to the public and not-for-profit sector.

Then, during November of last year, Castleton acquired Documotive Limited a document management software and scanning business focused on the social housing sector. 

The full benefits of these two deals are yet to show through in Castleton’s results.

However, we do know that for the six months ended 30 September 2014, Montal contributed revenues of £1.9m for the Castleton group.

Still, the company is yet to report results for the past six months. 

Acquisitions 

Castleton has been extremely busy during the past six months. Indeed, the group has been concentrating no both organic and bolt-on growth to boost sales. 

For example, at the beginning of March the company announced that it had acquired social housing managed services provider Keylogic Limited, for a consideration of £3.8m. 

Also, Castleton paid £0.5m for Opus Information Technology Limited with a further £1.5m payable dependent upon performance. 

Then, at the beginning of June, Castleton announced two more acquisitions. Firstly, the £5m acquisition of Impact Applications Limited, a provider of business-critical repairs management and scheduling tools to the social housing sector.

And secondly Castleton paid £5m for Brixx Solutions Limited, a provider of software enabling users to produce financial models and long-term forecasts.

Market leader 

Thanks to these acquisitions, in the space of just a few months, Castleton has become the leading supplier of software and services to the social housing sector.

Nearly a third of all the social housing associations in the UK are now Castleton customers.

Moreover, Castleton’s management estimates that the group’s revenue run rate now stands at £18m per annum, 50% of which is recurring — not bad for a company which reported revenues of less than £2m last year. 

Conservative projections 

Based on Castleton’s current revenue run rate, City analysts expect the company to report a pre-tax profit of £0.1m for 2015. A pre-tax profit of £3.2m is projected for 2016.

These numbers suggest that Castleton is trading at a forward P/E of 15.1.

However, based on the company’s aggressive growth achieved during the past few months, these forecasts could already be out of date. 

Unfortunately, with this being the case, I’m hesitant to try and place a per-share target on Castleton at present. Nevertheless, it’s clear that Castleton is growing rapidly, and there could be further upside to come. 

The post Can Castleton Technology PLC Hit 6p By The End Of The Year? appeared first on The Motley Fool UK.

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Does that signal upside?

If so, bear in mind that its current valuation also signals the likelihood of high volatility in weeks ahead. 

Just A Fraction Of $1.5bn Would Do!

Unfortunately, its fair value is hard to gauge because its trailing income statements, cash flow statements and balance sheets provide little information with regard to its track record, while estimates for future revenues and profitability should be regarded as highly uncertain at present time. 

So, we are almost blind on financials: not only any possible guidance is premature, but it hinges merely on external factors. We know now that the biggest threat associated to the investment case is political risk in Indonesia, a country that historically hasn’t been kind with institutional investors and foreign firms. 

What’s encouraging is that Churchill managed to raise £850,000 through a placing of 8.5m new ordinary shares at a price of 10p per share less than a month ago, proceeds of which will be used to reach a settlement with the government of Indonesia. The matter is pretty serious, and concerns one of the world’s biggest coal reserves — the “East Kalimantan coal project”, which is valued by Churchill at $1.5bn.

Assuming Churchill fetches half of that amount, its current asset base would sky-rocket to half a billion pounds, and its stock price will most likely go through the roof — its market cap currently stands at £48m, which says a lot about the risk involved. 

Talks are ongoing, but Indonesia has shown in the past that such negotiations could drag for years. The government has so far dropped allegations of fraud against Churchill, but uncertainty remains as wrongdoings of Churchill’s partners in the project could reportedly weigh on the outcome.

One element I like a lot is that the miner also announced last month the “issuance of warrants over ordinary shares on the basis of one warrant for every two placing shares exercisable at a price of 15p per ordinary share and expiring on 30 June 2018“. This signals a certain degree of confidence in the outcome of the proceedings — confidence and nerves of steel are what you need to invest in it, of course.

Castleton Technology Grows

With a tiny £33m market cap, Castleton is a bet on how quickly the company will grow by snapping up certain assets that target the public and not-for-profit sectors. “Nearly a third of all the social housing associations in the UK are now Castleton customers,” chief executive Ian Smith pointed out in the wake of recent deals in the space. 

Its stock changes hands at 3.11p right now, which is close to its 52-week high.

Over the last 12 months, Castleton has made good progress. Its management team is building the company by seeking inorganic growth, which makes a lot of sense in the software support services world, particularly for listed companies. 

Last week, it announced to have acquired Impact Applications and Brixx Solutions for a total consideration of £10m, which isn’t small change for Castleton — which, however, seems to have financing options. 

This services firm, formerly known as Redstone, has changed a lot in recent years and is now managing expectations, drawing the attention of retail investors, while focusing on more profitable operations in its assets portfolio. If anything, it has a huge amount of shares outstanding, which may not be such a good thing if things do not go according to plan. 

The post Castleton Technology PLC Or Churchill Mining Plc: The Penny Stock Of The Century? appeared first on The Motley Fool UK.

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.