With the General Election and Brexit being two major risks for UK investors, finding shares with upbeat growth prospects could become more challenging. Although June’s election may appear to be a foregone conclusion and Brexit talks may yield a favourable deal for the UK and EU, the risks of differing outcomes remain. Therefore, it may be prudent to buy strong growth shares which also offer a wide margin of safety, given the risks which investors face.
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.
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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.
