The company describes itself as one of the UK’s “leading” independent providers of managed services for IT, connectivity, unified communications solutions, and cloud services. And the directors have been pursuing a growth agenda based on both organic progress and acquisitions.

Why I’m considering this small-cap growth share

Today’s full-year results report shows what the directors describe as “a resilient financial performance under highly challenging trading conditions.” And the company claims to have made “considerable progress” in its strategic ambitions, despite the disruption caused by the pandemic.

In the 12 months to 31 March, revenue declined by just over 6%. And adjusted diluted earnings per share slipped 20%. But cash flow held essentially flat. And the firm’s cash balance increased by almost 12% to just over £13m.

On top of that encouraging cash performance, net debt declined from almost £28m the prior year to just under £26m. When it came to dealing with real pound notes, Adept Technology did well during the year.

Just over 55% of overall revenue came from the public and healthcare sectors. And that figure grew from just under 45% the prior year. Those sectors tend to generate stable demand. So I see the firm’s advance as attractive. Meanwhile, revenue from cloud-based services increased by 9% to just over £25m, making it around 43% of total revenue.

I reckon Adept Technology is doing a good job migrating to business areas that are relevant now. Revenue from traditional telephony, for example, came in at just 19% of the total, down from 21% the year before. The situation makes me think of an old business aphorism: adapt or die.

A positive outlook

During the year, the company arranged an enlarged banking facility worth £50m “to support investment in growth.” And in April, the long-running acquisition programme continued with the purchase of a company called Datrix. The directors describe the new business as being focused on enterprise networks and security. And that, they reckon, enhances Adept Technology’s core capabilities and “strengthens its presence in the NHS vertical market.” 

Looking ahead, “strong” operational momentum from the fourth quarter has continued into the new trading year. And chief executive Phil Race is “confident” the opportunities for the business are robust. He reckons the technology market is “vibrant” and demand for ICT services is at an “all-time high and likely to remain so.”

Meanwhile, with the share price weak today, it’s sitting near-288p, as I write. And at that level, the forward-looking earnings multiple for the trading year to March 2022 is around 10. I reckon the valuation’s fair.

However, there are risks for shareholders. One is the potential for the company to ramp up debt if it becomes carried away with its acquisition programme. Another is the increasing reliance on the public and health sectors. If the company falls out of favour with a big public-sector customer, revenues, earnings and the share price could all crash together.

Nevertheless, I’m tempted to add the small-cap growth share to my long-term diversified portfolio for its potential to expand. I’d aim to hold for at least five years as the story unfolds.

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Today, I’m profiling two smaller companies with strong growth potential that I believe could be of interest to long-term investors.

AdEPT Technology

£94m market cap AdEPT Technology Group (LSE: ADT) is a leading independent provider of managed services for IT, unified communications (linking devices), connectivity and voice solutions. Its tailored services are used by thousands of customers across the UK, including the NHS. The stock has performed exceptionally well recently, rising 24% over one year and 190% over five, yet I think there could be more gains to come in the medium-to-long term.

AdEPT has enjoyed robust growth over the last five years (revenue CAGR 17.2%) and half-year results released today show that the company continues to have momentum. Indeed, for the six months to the end of September, total revenue increased 9.5% to £24.4m, adjusted earnings per share rose 11.7% to 14.5p, and the group increased its dividend by a healthy 15.3% to 4.9p per share. While these results perhaps aren’t as strong as some were hoping for (the shares are down 5% today), I think the numbers are solid in the current environment, as business spending is down due to Brexit uncertainty.

Looking at its metrics, there’s a lot I like about the stock. Return on equity is solid, averaging 23.5% over the last three years and dividend growth has been impressive, with the payout growing nearly 500% in just five years. The valuation looks attractive too, as the forward P/E is 12.7 and the P/E-to-growth ratio (PEG) ratio is just 0.64, which is very low. My only concern is debt, which is a tad high, and has increased in the recent half year. That’s something to keep an eye on. Overall however, I see considerable potential here.

dotDigital

Another small-cap that I like right now is dotDigital Group (LSE: DOTD). Its shares are up around 285% over the last five years.

Its key product is its email marketing platform ‘dotmailer’ – an advanced platform that enables companies to create, test and send data-driven automated email campaigns, and provides access to rich insights in real time. It’s worth noting that despite the rise of social media advertising in recent years, email remains a very popular marketing channel for businesses today, as it delivers a return of £39 for every £1 spent, according to the company.

Growth here remains strong, and in its most recent full-year results released in mid-October, the group reported revenue growth of 35% and adjusted basic earnings per share growth of 28%. Yet the shares have had a choppy year, due to concerns over GDPR earlier in the year and the recent small-cap/technology sell-off, and they can currently be picked up for 15% less than the price at the start of the year, on a forward P/E of 22.8. I think that’s a very reasonable price to pay for a slice of this high-growth business. As such, I rate the stock as a ‘buy’. 

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London and the South East

With this in mind, today I’m looking at two smaller companies that have indeed had a great run in recent years, but in my view should stand the test of time and continue performing well long into the future.

First up is small-cap integrated telecommunications group AdEPT Telecom (LSE: ADT). The AIM-listed firm, based in Tunbridge Wells in Kent is one of the UK’s leading independent providers of managed services for IT, unified communications, connectivity and voice solutions.

Transformation

It wasn’t always thus. In early 2015 the company embarked on a journey to transform itself from its original telecoms background into unified comms and then into IT, with a particular focus on London and the South East, as well as the public sector.

That looks to me like a sound strategy considering the fact that the economy in London and the South East is forecast to grow faster than the other regions in the UK, and that there is an increasing drive in the public sector to do more business with small and medium-sized enterprises (SMEs).

AdEPT is currently valued at just £68m, and last year generated £3.4m in pre-tax profits on revenues of £34.4m. At present levels I believe the shares offer exceptional growth at the very reasonable price of 13 times current year earnings.

Environmental technologies

For those who are still reluctant to go fishing for stocks in London’s junior AIM market then fret not, I may have found an equally worthy alternative. Porvair (LSE: PRV) is a company I first picked out last year as one of the stocks you might brag about owning some day, with the specialist filtration and environmental technologies group again enjoying another good year in 2017.

In a trading update last month, the Norfolk-based group said that underlying revenue growth for the year to November 2017 was 11%, largely due to higher levels of growth in its Microfiltration division, although sales in its Metals Filtration division were not so hot, remaining broadly flat. And while preliminary results aren’t due to be announced officially until later this month, it’s expected that full-year earnings will be somewhat ahead of management’s previous expectations.

Porvair has delivered strong growth in recent years, with the share’s high rating reflecting the market’s bullish long-term view on the stock. Nevertheless, the shares are still worth buying on a current year earnings multiple of 26. A little expensive perhaps, but I reckon they’re well worth the premium.

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Good figures

Shareholders here will be looking for a continuation of the organic- and acquisition-fuelled growth that produced a string of double-digit percentage increases in earnings per share (EPS) over several years, driving the share price from 20p during 2011 to 320p today. The figures don’t disappoint.

Highlights include revenue up 19.2% compared to a year ago and adjusted EPS shooting 20.3% higher. The directors crowned the year’s achievements by bunging an extra 19.2% into the total dividend for the year. So far, so good.

Acquisitions and debt

The firm bagged three acquisitions during the period in Comms Group UK, CAT Communications and OurIT Department, but one negative consequence of this activity is that year-end net debt ballooned by 158% to £15.5m. The company agreed on a new five-year £30m revolving credit facility with Barclays and Royal Bank of Scotland, which is a level of borrowings that represents around seven times this year’s figure for operating profit if it’s all drawn down. That’s on the high side and I reckon Adept Telecom is raising the stakes when it comes to hunting for further growth.

However, the firm’s record on cash inflow is good and I think the business is showing signs that it has defensive qualities, which could support higher levels of debt. Nonetheless, I’d be inclined to keep a close eye on borrowings from here.

Undemanding valuation

City analysts following the firm expect earnings to rise 5% for the year to March 2018, which is a slower rate of growth than we’ve become used to, but the valuation looks undemanding. The forward price-to-earnings ratio runs just below 13 and the forward dividend yield sits at 2.5% with the payout covered just over three times by anticipated earnings.

Meanwhile, large-cap engineering support services company Babcock International Group (LSE: BAB) updated the market today on trading from 1 April onwards.

The firm supports the defence, energy, emergency services, transport and education sectors and said the financial year started well. Trading has been in line with the directors’ expectations and the outlook for the year is unchanged. To put that in perspective, with the full-year results on 24 May, the directors said they were confident of achieving mid-single-digit organic revenue growth at constant exchange rates. They also said margins would remain broadly stable for the year and over the medium term. City analysts expect earnings to lift 4% for the year to March 2018 and 9% the year after that.

Bearing down on debt

To give you a flavour of the firm’s operations, one recent contract win is a £500m order to operate a fleet of specialist fixed-wing aircraft for the Norwegian Health Service from summer 2019. Another is a Ministry of Defence programme to support the Royal Navy’s new Queen Elizabeth Class Aircraft Carriers and Type 45 Destroyers, worth around £360m over seven years.

Encouragingly, Babcock is moving the opposite way from AdEPT when it comes to debt, expecting to reduce borrowings during the second half of 2017/18. At today’s 866p share price, you can pick up some of the shares on a modest forward P/E rating of 9.5 and a forward dividend yield of 3.7%.

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AdEPT’s sales increase was largely due to the five month revenue contribution from Comms Group, following its acquisition in May. In fact, Comms contributed around 12% of the revenue increase in the first half of the year, which means that excluding its impact AdEPT’s sales increased by a more modest 7%.

Of course, this still represents a strong performance in a highly competitive sector. AdEPT was able to enjoy considerable success in the public sector and healthcare space during the period. It won new contracts with organisations in those sectors as a result of its various framework agreements. This has seen an increase in contracts with 40 councils at the end of the interim period.

AdEPT’s transition from a traditional fixed line service provider to a complete communications integrator continues to progress in-line with expectations. Revenue from managed services including data connectivity, hardware and cloud-based contact centre solutions, rose by 53% and accounted for 53% of total revenue. Looking ahead, there is more potential for growth in this space, which could boost AdEPT’s overall financial performance.

In terms of its growth prospects, AdEPT is expected to grow its bottom line by 11% in the current year and by a further 1% next year. Beyond that, AdEPT has the potential to continue to grow as a result of its transition. AdEPT’s price-to-earnings (P/E) ratio of 11.8 indicates that it offers good value for money and a favourable risk/reward ratio.

Of course, AdEPT is a relatively small business and lacks the diversity, size and scale of other telecom and media companies such as Sky (LSE: SKY). In Sky’s case, it is also in the midst of a period of transition which will see it become a quad play operator when Sky Mobile is launched. This is likely to provide considerable cross-selling opportunities for Sky and could help to differentiate its offering versus other operators.

Although Sky trades on a higher P/E ratio than AdEPT of 13.6, it has a much lower risk profile. Not only is it better diversified, Sky has a more resilient earnings profile thanks to its operations spanning the UK, Germany and Italy. Its revenue stream is also more varied and this means that its growth outlook is arguably more stable and easier to predict than is the case for AdEPT.

As such, Sky seems to be a better buy than AdEPT at the present time based on the two companies’ risk/reward ratios. AdEPT may prove to be an excellent long term buy, but Sky offers a degree of stability in a highly competitive telecoms and media space.

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Cambria’s underlying pre-tax profit rocketed 40.1% higher to £4.6m during the first half of the year, thanks to a 14.7% rise in sales and to big increases in profit margins on new and used cars.

On the face of it, Cambria shares look cheap. Before today’s results, earnings per share were expected to rise by 30% to 7.9p this year. This figure is now likely to be upgraded — I’d estimate that perhaps 8.5p per share is likely. This puts Cambria on a modest forecast P/E of about 8.8.

However, you need to remember that Cambria is a cyclical stock. New car sales have been fuelled by very cheap credit and may now be close to a cyclical peak. Although this is a risk, to some extent it’s offset by Cambria’s strong aftersales business. Servicing and repairs carry a much higher profit margin than car sales, and generated 40% of the group’s gross profit during the first half.

Overall, I think it’s probably too soon to sell Cambria. Further gains are possible.

High-risk banking

I’m not so sure about Standard Chartered (LSE: STAN), where the outlook remains as uncertain as ever. Although the bank’s bad debt problems don’t yet seem to be as serious as we feared, things could still get worse. Standard Chartered is heavily exposed to China, India and the commodity market.

The real problem is that there’s simply no way of knowing what will happen. City brokers have continued to slash their earnings forecasts for the firm in recent months. A year ago, Standard Chartered was expected to report earnings of $1.49 per share for 2016. Today, the forecast is for earnings of $0.30 per share — 80% less.

This high level of uncertainty means that while Standard Chartered shares could certainly deliver a 30% gain if things turn out well, they may also fall by another 30%. As a shareholder myself, I’m considering cutting my losses to avoid the risk of further falls.

Acquisition should boost earnings

Services firm Adept Telecom (LSE: ADT) has risen by 50% over the last year. The shares rose by 3% this morning after Adept announced the £3.5m acquisition of Comms Group, a similar UK firm.

Adept expects the acquisition to be “immediately earnings enhancing”, which suggests to me that broker profit forecasts for the current year may now be upgraded.

Comms generated an operating profit of £0.8m for the year to 31 March. I expect Adept’s operating profit to be £3m-£4m for the same period, so the Comms contribution to this year’s results should be meaningful.

Adept shares currently trade on about 14.5 times 2016/17 forecast earnings and offer a prospective yield of 2.7%. I think it’s reasonable to assume that both Adept and Comms Group will generate similar profits to last year, plus additional organic growth. On this basis I’d rate Adept as a buy, as I think the shares could quite easily rise by another 30%.

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City analysts following the firm expect earnings to expand by 7% for the year to March 2017. That puts BT on a forward price-to-earnings (P/E) ratio of almost 15. And the forward dividend yield runs at 3.2% with those earnings covering the payout just over twice.

A successful rollout

The valuation looks about right to me, so there’s no obvious potential for the shares to re-rate upwards on valuation grounds. If BT’s shares are to perform well next year, we’ll need strong news flow regarding growth

Much hinges on the rollout programme for fibre broadband. Back in October BT said it continues to invest heavily to help the UK remain a broadband leader among major European nations. The figures are impressive. The firm’s open access network now passes 24 million premises in Britain and counting. Meanwhile, the directors reckon that demand for fibre is robust and five million homes and businesses are already connected.

So BT has obvious growth potential. But let’s not forget that the share price has already risen more than 520% since 2009. There’s a fair amount of cyclicality in BT’s business, which means the firm’s valuation has potential to contract as we move through the more mature phase of the current economic cycle. I wonder whether valuation-compression might hold back total returns for investors from here, even as growth continues. I’m cautious on BT now.

Impressive growth

I’m more attracted to FTSE AIM company AdEPT Telecom (ADT). The firm provides fixed line calls, line rental and broadband telecom services to commercial customers, ranging from small businesses to nationwide chains that have hundreds of branches. As well as organic growth, Adept pursues an acquisition programme with the aim of consolidating the telecom services industry. Growth has been robust and the shares are up 1325% since 2010, but there’s good reason to think that there’s more to come.

AdEPT won three framework contracts – for national and local governments, and for academic institutions. That happy situation now means that the firm is a nominated supplier and starting to win big contracts, such as the telecom services for whole councils. Meanwhile, a new £15m revolving credit facility has sufficient capacity left over after a recent acquisition to fund further purchases of earnings-enhancing businesses. The directors are relaxed about funding acquisitive growth with debt, citing the firm’s strong cash generation as justification.

At today’s 285p share price, AdEPT Telecom trades on a forward P/E rating around 15 for the year to March 2017 and there’s a forward dividend yield of 2.5%. City analysts following the firm expect forward earnings to cover the payout 2.6 times.

I think there’s a good chance that AdEPT Telecom could outperform BT during 2016. At the very least the firm is worthy of further research and inclusion on my watch list. One thing that I can’t deny is the blistering operational performance of the company so far.

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Small oily

Invest in a small oil explorer now? Am I mad? Maybe, but I’ve been looking to see what’s wrong with Indus Gas (LSE: INDI) and why its shares are valued so lowly, and I can’t see it. We’re not looking at a loss-maker here, no: Indus has been in profit for several years and there’s a near doubling of EPS expected for the year just ended, which would put the 108p shares on a P/E of just 10.

That expectation is based on the firm’s Indian resources, with last December’s Competent Person’s Report suggesting the presence of 872 billion cubic feet equivalent of natural gas! That’s a lot of gas, but even that hasn’t pleased the punters over the past 12 months as the shares have lost 70% of their value.

Indus isn’t one to bet the farm on, but I reckon a small punt could easily turn into a multibagger.

Telecoms wealth

I have to confess to taking my eye off the ball with AdEPT Telecom (LSE: ADT), which I really liked the look of a few years ago. I let it slip off my screen — and the share price has rocketed by nearly 1,300% in the past five years! That included a 126% rise in the past 12 months alone, and yet at 265p the shares are still on a P/E of a modest 15 with further growth predicted.

It’s growth with a good track record too. The year to March 2015 brought in the firm’s twelfth consecutive year of increased underlying EBITDA, with a rise of 13.5% — and it’s that kind of steady growth that builds into the big money.

Dividends only commenced in 2013 with 1.5p paid, but by this year shareholders saw 4.75p, and 6.7p per share by 2017 is currently forecast. The early massive share price appreciation is surely over, but AdEPT looks like it’s set for long-term profits.

Picks and shovels

My third choice is Gulf Marine Services (LSE: GMS), which provides various sized floating barge things to the oil industry in the Gulf. Not too exciting, you might think, but I’m seeing a picks and shovels business that has serious potential over the long term, especially when oil starts to recover.

Right now, Gulf Marine is on a valuation that’s so low it looks silly to me, with forward P/E multiples of just 6.8 for the year to December 2015, dropping to only 5.5 based on 2016 forecasts. And it’s currently profitable, with H1 revenue this year up 8% on 2014, although adjusted EPS did fall a little in line with a forecast full-year drop. But forecasters expect a return to growth in 2016, and there’s a unanimous Strong Buy rating on the shares from the analysts.

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Precious

Shares in Jubilee Platinum (LSE: JLP) have more than trebled in price in the past 12 months, to 4.4p, with the bulk of the gain coming since the middle of July — and that’s all happened while the price of platinum has been falling! So what’s the story?

The company has been working on a new platinum surface processing project, which CEO Leon Coetzer has described as “transformational”, with plans for processing an estimated 4.4 million tons of platinum-containing surface material. The big boost came on 16 July when Jubilee announced the sale of its non-platinum Middelburg assets for £5.8m which would help fund the surface processing project.

Then on 4 August we heard that the debt portion of the funding is pretty much secured with “a major financial institution”. The times ahead could be exciting.

Mature drugs

Alliance Pharma (LSE: APH) shares have been climbing ahead of interim results due on 9 September, gaining 73% to 59p since this time last year — with most of the rise coming since mid-June. A pre-close update in July, from the company that specialises in acquiring “mature” pharmaceutical products and then manufacturing and marketing them, indicated first-half sales of around £22.8m and told us that Alliance “continues to explore a number of acquisition opportunities“.

Whether that acquisition plan justifies the current share valuation is uncertain, though, as we’re now looking at a forecast P/E for 2015 of more than 17, with only single-digit EPS growth expected this year and next and dividend yields only around 2%. On that kind of valuation, I can’t help feeling the shares are high enough at the moment.

Telecoms success

For a really stunning rise, we only need to look at AdEPT Telecom (LSE: ADT). Its shares have doubled over the course of a year to 249p, which is good enough on its own — but they’ve 12-bagged in five years!

AdEPT provides business telecommunications services, and it’s a strategy that has paid off in the form of double-digit earnings growth every year for five years in a row and with the same forecast this year. At the same time, the dividend yield has gone from nothing in 2010 to 3.4% last year. The big question is when that growth is going to slow, especially as this is a small company in a very big market — and EPS growth for 2017 is currently forecast at only 2%.

At market-average P/E ratings the shares don’t look overpriced, but for me the rapid price growth is in the past now.

The post 3 Soaring Small-Cap Bargains: Jubilee Platinum PLC, Alliance Pharma plc And AdEPT Telecom plc appeared first on The Motley Fool UK.