Today I’ll explain why I remain bullish on these stocks, even after several years of growth.

Operating at capacity

The UK brick manufacturing industry is “operating at capacity” with “limited options for expansion”. That’s the view of Martin Warner, chairman of Michelmersh Brick Holdings (LSE: MBH).

Shares of this £64m firm edged higher today after the group said revenue rose by 26% to £37.9m last year. Underlying operating profit climbed 42% to £6.5m during the period. This implies an operating margin of 17.5%, highlighting the strong pricing power enjoyed by brick manufacturers at the moment.

Last year’s growth was helped by the £31.2m acquisition of brick-maker Carlton, which the company says has “significantly strengthened” the group’s market position. One downside to this is that this large deal left Michelmersh with net debt of £17.5m at the end of 2017, versus net cash of £4.7m one year earlier.

I estimate that it could take two years to reduce these borrowings to a more comfortable level. If the market slows during this time, shareholders could face elevated risks.

This could still be a buy

The outlook for 2018 seems safe enough at the moment. Mr Warner says that “2018 promises to be busy” and that the group’s order book, at 60m units, is “strong”.

Consensus forecasts suggest that earnings per share could rise by 40% to 8.2p this year, as the Carlton acquisition contributes a full year of profits. The dividend is expected to climb 44%, to 3.1p per share.

These numbers put the stock on a forecast P/E of 10, with a prospective yield of 3.7%. The shares remain attractive in my view, although I’d prefer a stock with less debt at this stage in the market cycle.

This Woodford pick has soared

One possible choice is brick and block maker Forterra (LSE: FORT). Shares in this firm have risen by 71% since its flotation in April 2016. It’s been a strong performer for fund manager Neil Woodford, but are the shares still worth buying?

Forterra around nine times larger than Michelmersh, measured by market cap and sales.

The group’s larger size means that acquisition opportunities are limited, but I’m not bothered by this. At this point in the market cycle, I’m happy to see management focusing on profitability and cash generation.

A cash machine

Last week’s 2017 results suggested that’s exactly what’s happening. The group’s underlying operating margin was largely unchanged at about 20% in 2017, but operating cash flow rose by 29% to £90m. This equates to 140% of operating profit, compared to 118% in 2016.

As a result, net debt fell by £31.5m to £60.8m, despite the firm spending £20m on the acquisition of Bison Manufacturing. Forterra now trades on a price/free cash flow ratio of 9, which is unusually low.

Analysts expect both earnings per share and the dividend to rise by about 9% this year. These forecasts put the stock on a 2018 P/E of 11.5, with a prospective yield of 3.5%.

I’d rate Forterra as a buy at these levels and would probably choose it over Michelmersh, thanks to the larger firm’s lower debt levels.

The post Why this Neil Woodford dividend-growth stock could have further to go appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Big in SIPPs

The company started up in 2009 to focus on the pension market and now administers many of the UK’s Self-Invested Pension Products (SIPPs) and a few Small Self-Administered Schemes (SSASs). Organic and acquisitive expansion drive growth, and a big part of the good figures we see today derive from a full contribution from the May 2016 acquisition of Suffolk Life Group Ltd.

However, the Suffolk Life Brand isn’t responsible for all of the good news. The directors insist that strong organic growth played a part too, and organic new business is running at an annualised rate of expansion of over 9,000 SIPPs. The firm has around 75,000 SIPP clients generating assets under administration around £23bn. So organic growth is running at about 12% per year. In the firm’s eight years of existence, it has grown to become the UK’s largest dedicated Full SIPP provider.

I reckon the Suffolk Life purchase was good value. Back in May 2016, Curtis Banks raised £27m through a placing of new shares to fund the acquisition along with existing cash resources and new debt. At the time, the placing diluted existing shareholders by about 19%. Meanwhile, borrowings sit at around £95m, which compares to the current market capitalisation of £151m or so.

More to come?

The firm reckons it has long-standing relationships with regulated advisory firms that introduce clients, and high levels of repeat business make the directors confident that customers are pleased with the service and organic growth will continue. City analysts following the firm expect earnings to advance 37% for the whole of 2017 and 10% during 2018.

But just as the acquisition of Suffolk Life was transformational for Curtis Banks, Michelmersh Brick Holdings (LSE: MBH) is also digesting an acquisition that looks set to launch the firm’s figures into a quantum leap. The specialist brick manufacturer released its half-year report today with revenue up 6% and earnings per share declining almost 8%, but the results to the 30 June show just seven days of trading after the £31m acquisition of Carlton Main Brickworks.

Another transformation?

The directors expect the acquisition to deliver a “significant” increase in the output of bricks and financial performance for the firm during the second half of the year, which means we could see a spectacular change along the lines of Curtis Banks’s recent performance. Meanwhile, Michelmersh offset some of the cost of the acquisition with the sale of its Dunton site for £2.68m, but still increased net debt to £20.7m after drawing £24m to meet the full cost. Prior to that, the firm had £2.7m in net cash.

Although both Curtis Banks and Michelmersh Brick have geared up their balance sheets to make their big acquisitions, I reckon future cash flows could help both firms pay down borrowings in reasonable time. From an investing point of view, I think these two are worthy of your further research right now.

The post 2 small-cap gems that could make you brilliantly rich appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

For the period, the automotive dealer reported growth across the board with revenue up 16.5% to £2.8bn and adjusted profit before tax up 15% to £31.5m. Unfortunately, this increase isn’t reflected in earnings per share, thanks to an increase in the firm’s share count from 350m to 400m at year-end. As a result, earnings per share for the period only rose 1.3% to 6.14p. Still, all other important metrics showed impressive growth. Pre-tax profit rose 14.6%, and tangible net assets per share increased 3.1%, although if you readjust for the higher share count, net assets per share increased by more than 20%.

Further growth ahead?

Vertu was founded with the goal of creating a significant player in the UK motor sales industry by consolidating a highly fragmented market. Management has been highly adept at accomplishing that aim so far with revenue growing by 19.4% per annum on average since 2011 as acquisitions have helped boost growth. 

Management has adopted a sensible acquisition strategy, only buying what it can afford. And despite having increased book value from £97.5m in 2011 to £250m today, the company has little in the way of debt, with a net cash balance of £21m reported at the end of February.

Over the past five years, Vertu’s net profit has grown at a rate of 38.7% per annum, but despite this explosive rise, investors are still giving the company a wide berth. At the time of writing shares in Vertu are trading at an estimated forward P/E of 7.8 based on analyst forecasts for the year ending 28 February 2018. The shares support a dividend yield of around 3% and the per share payout has grown by 100% since 2013.

It would appear investors are concerned about the group’s exposure to the UK economy following Brexit. However, today’s results should go some way to allaying these concerns, and if management can repeat the performance of the past five years, there should be lucrative returns on the cards for shareholders.

Cash rich

Brick producer Michelmersh Brick (LSE: MBH) may not be the most exciting company trading on the London market, but that doesn’t mean it’s a bad investment. 

Over the past five years, the firm has gone from strength to strength, benefitting from the boom in UK housebuilding. Since 2012, shares in the company have risen by nearly 200% excluding dividends as pre-tax profit has risen tenfold. 

Unfortunately, during the past two years, growth has slowed, but management has been focused on reducing debt. At the end of 2016 the group reported a year-end cash balance of £4.7m, which should finance asset expansion and sales growth. Even though the shares appear pricey at 15.2 times forward earnings, Michelmersh looks well placed to return to its growth trajectory as the demand for its products remains robust. The shares currently support a dividend yield of 3%, and the payout is covered twice by earnings per share.

The post 2 small-cap growth stocks with monster potential appeared first on The Twelfth Magpie.

More reading

• Could these high-risk/high-reward penny stocks triple their value in the next decade?
• £500 buys 643 shares in this penny stock, expected to grow earnings 75% this year!

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Vertu Motors. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.