Many UK small-cap stocks performed well in 2017. As investors chased growth, smaller companies benefitted. Yet despite the rapid rises of companies like IQE and Softcat, plenty of smaller companies remain attractive at present.
Today, I’m profiling two fast-growing small-cap stocks that have strong prospects going forward, yet trade at very reasonable valuations.
Liontrust Asset Management
Liontrust (LSE: LIO) is an independent asset manager based in London. The company runs a range of active funds including global equity and sustainable investing mandates. The group has recently won several industry awards including Specialist Group of the Year.
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Shares in the asset manager have performed spectacularly well over the last five years, rising around 275%. A glance at past financials reveals why. Between 2012 and 2017, revenue increased from £14m to £52m, a compound annual growth rate (CAGR) of an impressive 30% and the company went from making a net loss, to generating a net profit of £6.8m. Furthermore, after reintroducing its dividend in 2013 with a payout of 1p, it lifted the distribution to 15p last year.
Looking ahead, City analysts expect the group’s momentum to continue. For the year ended 31 March 2018 sales and net profit are expected to reach £72m and £18.8m respectively. A dividend of 18.6p per share is anticipated, a yield of 3.8% at the current share price.
Yet despite this momentum, Liontrust shares look attractively valued. The stock has a forward P/E of just 12.5, which seems very reasonable, in my view. As a comparison, larger rival Schroders currently trades on a P/E of 17.2.
Of course, the £240m market cap stock is not without risks. Asset managers’ profits are generally related to the performance of global stocks markets. Therefore, a major bear market could impact profitability. Furthermore, as an ‘active’ investment manager, the group could suffer if investors continue to move away from active funds into ETFs.
But for now, it appears to have momentum. Given its attractive valuation and nice dividend yield, I believe it has long-term potential.
Costain Group
Another small-cap growth stock that looks to offer value right now is Costain Group (LSE: COST). The £490m market cap company is a technology-based engineering solutions provider that focuses on the UK’s energy, water and transportation infrastructures. It differentiates itself by offering integrated technology, consultancy, asset optimisation and complex delivery services to address the complex challenges of enhancing the nation’s infrastructure. The stock has been a strong performer over the last five years, rising almost 100%.
A trading statement released this morning revealed that business is ticking along nicely. The company said that since its August interim results, it has continued to “perform well” and that it expects to deliver full-year results in line with the board’s expectations. It≠ finished the year with a high-quality order book maintained at £3.9bn and a strong cash position of £150m. Chief Executive Andrew Wyllie commented: “Our performance is a direct consequence of our differentiation and our ability to provide the rapidly changing range of integrated services required by our major clients.”
Analysts expect sales growth of 9% for FY2017, along with a 36% surge in net profit. The dividend is anticipated to be lifted by 12%, taking the payout to 14.2p, a yield of 3%. Trading on a forward P/E of 13.9, the shares look attractively priced, in my opinion.
