A difficult period

Reporting on Wednesday was developer and operator of power generation plants in India, OPG Power Ventures (LSE: OPG). Its share price has fallen by 50% since the start of the year, with a sharp decline following its first quarter update contributing to its overall slump.

One reason for this is difficult trading conditions for the business. In the first quarter of the year it experienced sustained high seaborne thermal coal prices that have impacted on the sector as a whole. While prices are due to decline in the second half of the year, the company now expects a reduction in earnings for the full year in the absence of a material reversal in the coal price. Furthermore, it is currently experiencing lower average tariffs which are also negatively impacting on its overall performance.

Growth potential?

Despite this, the company’s business model remains robust. It expects a decline in coal prices over the medium term, as well as the anticipated tariff increases being promulgated by the relevant Indian state authorities. Furthermore, strong load factors and an improving sales mix in its customer base also mean it could deliver a turnaround. This could lead to stronger profitability in 2019 and beyond, with a dividend yield of 3.5% having the potential to grow.

However, with such a volatile share price and the potential for more disappointment in the second quarter of the year, there may be better options available elsewhere within the utility sector.

Stable outlook

One potential buying opportunity within the utility industry is water services company Severn Trent (LSE: SVT). It offers a highly defensive and robust business model which could become increasingly popular should uncertainty surrounding North Korea build in future months. It also has less political risk than other utility companies, such as those operating in the domestic energy sector. As such, it may command a premium valuation on a relative basis.

The company is expected to grow its bottom line by 10% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of 1.7, which is relatively low for a utility company. As well as this, it has a dividend yield of 3.9%. Shareholder payouts are due to rise by over 7% next year. At a time when inflation is forecast to increase over the medium term, this could boost demand for the company’s shares. This could make the present time the right moment to buy Severn Trent for the long term.

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Peter Stephens 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. 

Back on 30 May 2008 (the significance of the date will become apparent later), XP Power’s shares were trading at little more than 200p. The tremendous gains have propelled this developer and manufacturer of critical power control components for the electronics industry into the upper echelons of the FTSE SmallCap index with a market cap of £514m.

I believe XP Power can continue to deliver capital gains in the coming years, as well as strong dividend growth for the long term. As such, this is a stock I’d buy today with one eye on a rising share price and the other on a future strong income stream in retirement.

Highly attractive

The strong first-half performance reported today came on the back of encouraging momentum in orders and revenues, as new design wins enter production, supported by a recovery in capital equipment markets and sterling weakness.

Order intake increased 52% (35% at constant currency) to £93.4m, a new record for the company. Orders were strong across all the group’s geographical regions.

Revenue increased 33% (18% at constant currency) to £80.2m and adjusted earnings per share (EPS) of 68.2p was 30% up on the same six months last year. Ahead of today’s results, analysts were forecasting EPS of 123.2p for the full year. But annualising the first-half number gives 136.4p and a price-to-earnings (P/E) ratio of 19.2.

The P/E looks highly attractive for a company with XP Power’s growth record and prospects. And I anticipate the dividend rising strongly in the coming years from today’s starting yield of 2.9%.

The time is now right

I mentioned the terrific performance of XP Power’s shares since 30 May 2008 – the date on which OPG Power Ventures (LSE: OPG) began trading on London’s junior AIM market.

Investors who backed the 60p-a-share IPO of this developer and operator of power generation plants in India – or a further placing at 93p in 2011 – are currently sitting on losses. The shares are trading at 44.5p.

Having raised £65m in the IPO and a further £60m in the placing, OPG has built its portfolio of assets from 19.38 megawatts at flotation to 750 megawatts today. Despite now being a more attractive investment proposition, OPG’s market cap is £156m compared with £173m when it debuted on AIM.

Risk and reward

Risks for this India-based business – as detailed on pages 32 and 33 of the company’s latest annual report – should not be overlooked but I believe these are more than offset by an experienced management team, the current cheap valuation of the stock, and the long-term dividend prospects.

The company is forecast to post EPS of 6.2p in its upcoming annual results (17% ahead of last year), giving a P/E of just 7.2 at the current share price and a bargain-basement price-to-earnings growth (PEG) ratio of 0.4.

Furthermore, with the board having last year set out a dividend policy, with an initial highly conservative payout ratio of 15%, there’s considerable scope for the dividend to grow strongly from a maiden yield of 2%.

The post 2 growth-and-dividend small-caps I’d buy to retire on appeared first on The Motley Fool UK.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended XP Power. 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.

Upcoming pharma?

Vectura Group (LSE: VEC) is a smaller pharmaceuticals company developing inhaled treatments for respiratory diseases, and that’s certainly big business. Vectura took over rival Skyepharma in 2016, so full-year results (due in March) will be heavily influenced by that. The firm’s pre-close update said that things are going as expected, with the City predicting a 4% drop in EPS.

But that small fall is nothing to worry about, and 2017 looks to me like it could be a transformational year for Vectura. There’s a continuation of the last couple of years of earnings growth on the cards, with analysts forecasting 43% growth this year, followed by 52% next. But what does the share price look like?

Despite a couple of years of prior rises, the shares have been falling back since the beginning of 2016. And at 145p today, we’re looking at a forward P/E based on 2017 forecasts of 18, dropping as low as 11 for 2018. I reckon that’s cheap for a growth share, especially as it gives us PEG ratios of just 0.4 and 0.2 respectively (where 0.7 or less is usually seen as good).

Vectura looks tempting to me.

Power growth

If you’re looking for a straightforward business model, you’ve got it in OPG Power Ventures (LSE: OPG). OPG develops and operates power plants in India, and it’s turning into a nicely profitable business.

Earnings have been rising for several years now, and the firm paid a maiden dividend of 0.26p per share at the interim stage after announcing a doubling of revenue and an 81% rise in EBITDA. We also saw free cash flow of £20.6m and a small fall in debt.

There’s a 0.89p dividend, for a 1.6% yield, predicted for the full year ending March 2017, and forecasts suggest it will rise as high as 3.8% by 2019. But the dividend is not the only attractive thing.

At 56p, the share price has almost halved since its 2015 peak, and that’s dropped the forward P/E as low as nine, dipping to a forecast 7.3 by 2018. And that gives us PEG ratios of 0.5 this year and 0.3 next, which look pretty good. There will be uncertainties due to India’s sometimes unpredictable regulatory regime, but that valuation looks low enough to me to more than compensate for the risk.

Where there’s muck

Augean (LSE: AUG) not only has a great name for a waste management company, it also has attractive-looking growth prospects. The firm’s January trading update told us that 2016 pre-tax profit should be in line with expectations, supporting a predicted 14% rise in EPS. That comes after a solid five-year record of EPS growth, with a further 15% expected this year.

We also heard that Augean “generated strong net operating cash flows during 2016 and as at 31 December 2016 net debt was £10.8m which is £2.3m better than expected,” so the firm’s modest but progressive dividends (yielding around 2%, but rising) are pretty much assured.

Despite the squeaky clean outlook, Augean shares are lowly valued. At 49p, they’re on a P/E of only 9.3, dropping as low as 6.6 on 2018 forecasts — and PEG ratios come in at 0.3 for 2017, followed by 0.6. Could be the best growth prospect of the three.

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Alan Oscroft 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.

Solid telecoms

My first pick is KCOM Group (LSE: KCOM), which serves the Hull and East Yorkshire area, while providing domestic and business telecoms. This actually isn’t one I’d overlooked, as I’ve had my eye on it for some years. The share price hadn’t really gone anywhere much over the past decade, but at 90.5p as I write it’s doubled over the past 12 months.

EPS is forecast to drop this year and next, before stabilising, as the firm is restructuring to simplify its branding and operations. With first-half results, chief executive Bill Halbert said that “capital expenditure is likely to peak over this year and the subsequent year” as the firm’s fibre network is rolled out.

The key attraction for me is KCOM’s dividend, which is expected to yield 6.7% this year. It will be barely covered, but Mr Halbert promised us 6p per share for this year and next, and I can see KCOM maturing into a desirable cash cow.

Power to India

OPG Power Ventures (LSE: OPG) is one I didn’t really know, but I’m intrigued by what I see. The shares have fallen over the past couple of years, to 61p, but that gives us a prospective P/E ratio of only 7.5 for the year to March, and if growth forecasts come good, we’ll see that dropping as low as five by March 2019.

A PEG ratio of just 0.1 this year, rising only as far as 0.3 over the next two years, also puts the shares firmly into the range that growth investors look for — anything under 0.7 is typically seen as a good sign.

But what does it do? OPG develops and operates power plants in India, and first-half results released in December suggest we could be at a transition point. Revenue more than doubled, EPS rose by 41%, free cash flow came in at £20.6m, and gearing came down to 55% (from 58% six months previously). That led the company to declare its maiden dividend — only 0.26p per share, but it’s a healthy start.

I’ll need to investigate further, but OPG looks promising to me.

Cash from fibre

Shares in industrial thread manufacturer Coats Group (LSE: COA) have soared since September, to 60p, taking them up 170% over the past 12 months.

An October trading update told us that earlier “challenging market conditions” are improving, and that 2016 operating profit should be ahead of previous expectations — the results should be with us on 24 February. And after having been stopped in 2012, the dividend should be back this year — only a 1.4% yield, but it should be subsequently progressive.

The falling pound has helped Coats too, making its exports cheaper. And the firm has very little exposure to the EU, so Brexit shouldn’t really be a problem.

News that the UK Pensions Regulator will cease regulatory activity regarding two of the company’s pension schemes also gave the shares an extra boost, in December.

Even after this year’s gain, we’re still only looking at a P/E based on 2017 forecasts of 10.4, dropping to 9.5 next year. Definitely worth a closer look, I say.

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Alan Oscroft 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.

National Grid

National Grid runs Britain’s essential gas and electricity networks. Regulators set the company’s investment, pricing and returns parameters for long periods ahead. This gives management good visibility on the future, enabling long-term planning, and making for a very stable business. The company also has some geographical diversification, with energy businesses in the northeastern US.

As a lower-risk equity investment, National Grid is ideal for a core blue-chip holding in a shares portfolio. What’s more, now could be a good time to buy, because the shares are trading not far off their 52-week low and some 14% below their high.

Analyst forecasts put National Grid on a 12-month forward price-to-earnings (P/E) ratio of 14.1, with a prospective dividend yield of 5.3%. The P/E is in line with the FTSE 100 long-term average, which is a generous rating for a stable, premium business. The yield is also generous, particularly as it comes with a boardroom policy to increase the dividend each year at least in line with RPI inflation for the foreseeable future.

Jersey Electricity

Jersey Electricity was founded in 1924 and floated on the London stock market in 1964. The company is the sole supplier of electricity in Jersey, via interconnectors from France and some on-island generation. The company also runs the Channel Islands Electricity Grid in partnership with Guernsey Electricity.

Jersey Electricity is 62%-owned by the States of Jersey (the government), but the company is largely left to get on with the business of balancing the needs of the island and shareholders. Shareholders have seen an annualised total return (capital and dividends) of 10.1% over the past 10 years, which is ahead of National Grid’s 9.5%.

Although a smaller company than National Grid, Jersey Electricity nevertheless enjoys a low-risk monopoly position in its territory. The shares are currently trading at an all-time high, giving a forward P/E of 16.2 and a yield of 3%. While long-term investors could still see a decent return from current levels, I would be tempted to wait/hope for a dip in the price to add some useful satellite geographical diversification to a core National Grid shareholding.

OPG Power Ventures

OPG Power Ventures joined London’s junior AIM market in 2008. The company was founded to develop and operate power plants in India, after a 2003 liberalising act of parliament opened up the industry to private investment for the first time since 1948.

OPG has delivered compound annual earnings growth of over 40% over the last three years, and analysts have pencilled in more of the same for the next two years. More importantly, after heavy investment, OPG has now built sufficient scale to start generating cash flows (and dividends), which means the company is a less risky investment than in the early days — although this rupee-earner is by no means low risk.

Nevertheless, a small investment in the company would add geographical diversification and a bit of spicy growth potential to the power sector of an investor’s portfolio. A current-year forecast P/E of 14.8 falls to 10.3 next year, giving very attractive price-to-earnings growth (PEG) readouts of 0.3 and 0.2. Dividends could also grow fast from a symbolic maiden payout expected this year.

The post Power Up Your Portfolio With National Grid plc, OPG Power Ventures Plc And Jersey Electricity PLC appeared first on The Motley Fool UK.

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G A Chester has no position in any 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.