The London Stock Exchange’s Alternative Investment Market (AIM) can be a great source of lucrative investments. In this area of the market, there are a lot of fast-growing smaller companies that haven’t yet been discovered by mainstream investors. Here, I’m going to put the spotlight on one of my favourite AIM shares. This company is growing at a rapid rate right now, and I think the stock has bags of potential.
A rising star
The company in focus today is Cerillion (LSE: CER). It’s a software business that provides billing, charging, and customer relationship management (CRM) solutions, predominantly to telecoms firms.
Founded in 1999, it has a market cap of around £400m at present.
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Strong growth
One reason I’m bullish here is that the company is generating strong growth as telecoms businesses shift their operations to the cloud.
For the six-month period to the end of March, it posted:
- Revenue of £20.5m, up 27% year on year
- Annualised recurring revenue of £13.1m, up 34%
- Adjusted earnings per share of 25.5p, up 37%
- A dividend of 3.3p, up 27%
Clearly, the business is performing really well right now.
And management appears to be confident about the future.
“With a strong new customer sales pipeline, which includes advanced-stage contract discussions with certain potential new customers, as well as healthy demand from existing customers, we expect continuing strong growth ahead,” said CEO Louis Hall in the company’s H1 results.
It’s worth noting here that Cerillion was recently included in two Gartner market guide reports. Management believes that the inclusion in these reports highlights the company’s growing reputation as well as the breadth of its product portfolio.
Superb financials
The company also has a good track record.
In recent years, return on capital employed – a key measure of profitability – has risen dramatically. Last year, it hit 34%. Companies that can consistently generate high returns on capital tend to be good long-term investments.
As for the balance sheet, it’s strong. At the end of March, Cerillion had net cash of £23.6m on its books and no debt.
The company’s robust balance sheet, which carries no debt, and the increasing level of recurring income, provide a strong underpinning for the business as it continues to grow and develop. The board views near and mid-term growth prospects very positively.
CEO Louis Hall
Rising share price
Another thing I like about this stock is that the share price is in a powerful upward trend at the moment.
And what’s interesting is that when tech shares fell last year, Cerillion actually bucked the trend and posted gains (+36%) for the year. So, the stock doesn’t appear to have a strong correlation to the tech sector that can be very volatile.
Valuation
Now, one downside to this stock is that its valuation is relatively high.
Currently, it sports a forward-looking price-to-earnings (P/E) ratio of about 30 using the next financial year’s (ending 30 September 2024) earnings forecast of 44.5p per share.
This adds risk. If growth slows, I’d expect the shares to be hit.
I’m comfortable with the valuation, however. This is a high-quality company that’s growing at a fast pace and looks set to increase its earnings in the years ahead.
I’m invested here and I plan to hold the shares for the long term.
