But every once in a while, a hidden gem emerges and grows enough to leave penny stock territory and become a small-cap.

Investing in the latter is still risky. But the businesses are more established and proven, making an investment less speculative.

And one such company that has caught my attention this week is Science Group (LSE:SAG). Its share price is up nearly 60% over the last two years and could be primed for stellar growth when a new bull market emerges.

A top-notch ex-penny stock?

Science Group is an international science-led service and product development company. It works with businesses to consult on R&D projects, helps with regulatory compliance, and is a leading supplier of DAB/DAB+ radio chips.

It’s a pretty diversified enterprise for one that’s only got a market-cap of £177m. However, its services have proven invaluable to many industry leaders. For example, Science Group helped AstraZeneca develop an automated drug identification system. And it also assisted Vodafone in building its M-Pesa mobile payments solution that over 51 million people are using today.

Moreover, management’s latest decision to acquire TP Group could bolster its reach even further, throwing defence into the list of sectors it serves. Given its impressive track record, this move seems prudent. After all, it opens the door to government and military contracts that can be a reliable source of long-term income.

Over the last five years, Science Group has been quietly delivering double-digit revenue and profit growth, with margins slowly expanding. And this may be set to accelerate as we enter into a new bull market. After all, once economic conditions improve, spending on R&D is likely to increase, raising demand for the ex-penny stock’s services.

Investigating the caveats

As promising as Science Group looks, there are, of course, notable risks to consider. In the long run, management needs to ensure operations stay ahead of the regulatory curve. If out-of-date compliance advice is given to customers, it could have severe legal and reputational ramifications.

But there’s a more pressing concern in the short run. TP Group is a distressed business plagued by onerous legacy maritime contracts. These contracts are being renegotiated but, in the meantime, it has completely decimated the firm’s profitability.

Science Group’s decision to acquire it seems to be a turnaround play. And if successful, it could prove to be a tremendous source of long-term value. But the process may take some time. And a poorly executed strategy could harm the success of the ex-penny stock to date.

Having said that, the leadership team has proven to be shrewd, so far. That’s why I’m cautiously optimistic about the deal. And in the long term, I believe patient investors could be rewarded generously.

The post 1 of the best ex-penny stocks to buy for the new bull market? appeared first on The Motley Fool UK.

Prices of the consultancy group soared to fresh record peaks of 399p per share earlier in mid-week trading. They’ve settled lower but, at 390p, the Science Group share price remains 11% higher from Tuesday’s close.

Strong trading across Science Group

In today’s update, Science Group, which describes itself as “an international consulting services group supporting the entire product innovation lifecycle,” said all three of its divisions have enjoyed “a good start to the year.”

At its Services businesses, Science Group said its R&D Consultancy division — a unit responsible for around 44% of group revenues — “has seen particularly strong momentum in the Medical sector.” Growth here was strong in 2020, thanks to its participation in the UK government’s ventilator acquisition drive.

Elsewhere, Science Group said “the Regulatory & Compliance division has continued the progress demonstrated in 2020.” Finally, it added that its Frontier product division “continues to perform well with material supply constraints likely to be the biggest risk in the current year.”

On the back of this strong start, Science Group said it believes adjusted operating profit will grow 30% year-on-year in the first half of 2021. The company described it as “a particularly notable performance,” given the record profits it generated between January and June last year and the significant currency exchange headwinds it faces this time around.

Asset sale ruled out

Science Group also noted: “While it is still early in the year and the board is closely monitoring the impact of a strengthening sterling currency, this excellent start to 2021 provides a platform for the year as a whole and empowers the group management teams to continue to invest in future growth opportunities with confidence.”

Additionally, Science Group said it has decided to retain its Frontier division after floating the idea of a sale earlier in the year. The company said ongoing review of the unit “not only confirmed the strategic position of Frontier but also identified a number of opportunities to further enhance and develop the business which are currently being evaluated.”

Gross cash at Science Group stood at £29.5m as of 30 April, the firm said, while net funds clocked in at £13.3m. The company said added: “[Our] strong balance sheet and free cash flow generation enable [us] to continue to evaluate corporate opportunities to increase the scale and/or development of the Group in parallel with the organic investment activities.”

City analysts think annual earnings at Science Group will rise 2% in 2021. This leaves the company trading on a forward price-to-earnings (P/E) ratio of 19.7 times.

The post Science Group’s share price hits record highs after trading update appeared first on The Motley Fool UK.

And it looks as if this trend is going to continue. According to the results released today by the company for the six months ending 30 June, group revenue grew 2% year-on-year at constant currency and underlying profit before tax rose 4%. Including the impact of currency, revenue exploded by 30%, and underlying earnings per share grew 25% allowing the company to announce a 17% increase in its interim dividend. 

On a statutory basis, profit before tax rose 130% year-on-year and basic earnings per share increased 113% year-on-year. The one bad mark against the company for the period is a 32% increase in net debt to £190m, but on a pro forma basis (after adjusting for several acquisitions), leverage actually declined year-on-year. For the company’s full fiscal year, City analysts are expecting Tyman to report earnings per share growth of 26.5% and the shares are projected to yield 3.5%, although these forecasts could be on track for substantial revisions higher following today’s news. 

For example, analysts were only expecting a 10% increase in the company’s dividend payout. Based on current city expectations, shares in the building materials producer are trading at a forward P/E of 12.2, which looks cheap compared to the company’s current growth rate, but looks expensive if you believe the UK homebuilding market is about to collapse.

Diversification 

Tyman’s management is well aware of this risk and is working hard to diversify the group’s interests into North America and Europe, a process which is already yielding results as today’s numbers reveal. If management can continue to acquire attractive businesses at fair valuations and integrate successfully, as they have done over the past five years, then Tyman could have a huge runway for growth in front of it. It might pay off to invest in this growth story.

Cash cow

Science (LSE: SAG) looks to be another boring company with enormous potential. It provides scientific consultancy services and growth has been slow at the group. However, cash generation is strong, and management is working for shareholders by returning this cash to investors via buybacks. 

At the end of June 2017, the company had gross cash of £26.3m, up from £17.2m in the year ago period. Profit before tax for the period was £2.3m, and revenue for the half was £18m, up from £17.7m last year. 

With a healthy balance sheet, management is also looking for acquisition opportunities, and these could significantly increase the group’s growth potential. With this being the case, even though the shares look expensive trading at a forward P/E of 17.5, it’s clear Science can produce steady returns for investors going forward through both cash returns and bolt-on acquisitions.

The post Tyman plc is a stock I’d buy and hold forever appeared first on The Motley Fool UK.

In Continental Europe, Headlam benefitted from a positive currency translation. This meant that combined revenues rose by 8.9% and while this is a positive, weak sterling also produces a negative for the company. That’s because it causes the cost to Headlam of residential floor coverings to increase by an average of 6%. They’re imported from Belgium and the Netherlands and it means that Headlam will increase its selling prices by a similar amount over the next month.

Looking ahead, Headlam is forecast to increase its bottom line by 5% next year and with it trading on a price-to-earnings (P/E) ratio of 12.9, it seems to be fairly priced. Its yield of 4.8% from a dividend that’s covered over 1.5 times by profit remains its big draw, meaning it holds appeal for income-seeking investors.

Strong start

Also reporting today was NewRiver Retail (LSE: NRR), with the real estate investment trust (REIT) recording a strong start to the year. Its first quarter was busy with it improving its occupancy to 97% following 90 leasing events having been completed during the quarter. Furthermore, lease length and footfall were also improved, with NewRiver having made good progress on its Co-operative convenience store development programme.

The strong start to the year has allowed NewRiver to increase dividends by 11% to 5p per share. This puts the company on a yield of 6.8%, which is clearly among the higher yielding stocks on the UK index. As such, it has appeal for income-seeking investors at a time when interest rate cuts are being mooted.

However, with dividends being covered just 1.06 times by profit and the outlook for the UK commercial property market being uncertain to say the least, it may be prudent to await further news flow before buying a slice of NewRiver Retail.

Rising revenue

Meanwhile, Science Group (LSE: SAG) also reported today. The science and technology consulting company’s first-half performance was in line with management expectations, with revenue rising by 25.5% to £17.7m and adjusted operating profit being marginally higher at £2.5m. Encouragingly, Science Group’s operating cash flow remained strong, rising to £5.3m from £3.3m in the same period of the previous year, thanks in part to a VAT rebate of £1.5m in relation to a property purchase in 2015.

Looking ahead, Science Group is expected to increase its earnings by 29% this year and by a further 16% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.8, which indicates that now could be a good time to buy it.

The post Will Science Group plc, NewRiver Retail Limited and Headlam Group plc soar after today’s updates? appeared first on The Motley Fool UK.