Reshaping the business

The stock looks quite perky today, up around 3.5% as I write. City analysts following the firm expect earnings to lift 20% during 2018, which means the current share price around 11.9p throws up a forward price-to-earnings (P/E) ratio just below 20 – a fair-looking valuation if growth is set to continue.

The firm spent 2017 moulding the business into shape to get the most from its previous three years’ acquisition activity. That focus saw the firm launch its Nasstar 10-19 Programme aimed at achieving “an increased strategic focus to create one fully integrated business.” Nigel Redwood explained in the report that the programme requires staff to concentrate on the company’s key priorities, which should help the firm hit its target of raising margins from 20% to 25% of revenue by the end of 2019.

In November, Nasstar won a contract with a 1,000-user public/private hybrid cloud customer, one of several deals in 2017 that “serves to endorse the technical strategy that we adopted when embracing the integration of the public cloud into our private cloud services.” Mr Redwood thinks that move will make the firm’s offerings “very relevant and attractive” to the market in 2018.

The directors think Nasstar’s offering is becoming more attractive to larger clients, and I reckon we could see its strategic progress manifest as strong organic growth going forward. It is an interesting growth proposition and I think the stock could pair well in a portfolio alongside defensive dividend-paying pharmaceutical giant GlaxoSmithKline (LSE: GSK).

Steady trading plus potential

Nobody is expecting growth to shoot the lights out, and the patent expiry challenges faced by the likes of GlaxoSmithKline over the years have been well-reported. But I think the firm retains all of its defensive qualities. Demand for healthcare products is in a long-term uptrend and customers repurchase supplies of medicine whatever their economic circumstances, which leads to stable incoming cash flow for the company and predictable dividends for shareholders.

The dividend has held steady for the past five years, and City analysts expect earnings to contract by 5% this year before rebounding 5% in 2019. So, dividend growth in the near term seems unlikely. However, today’s share price around 1,470p puts the forward P/E rating for 2019 at just over 13 and the forward dividend yield is a little under 5.5%. It’s hard to make a case for the shares being expensive. Last month, chief executive Emma Walmsley said the company’s main priority is to strengthen the Pharmaceuticals business and the R&D pipeline. Such focus could lead to improved earnings growth down the line. While we are waiting for Nasstar and GlaxoSmithKline to deliver capital gains via their rising share prices, we could collect decent, defensive income from GlaxoSmithKline’s dividend.

The post Why I’d buy this growth stock alongside GlaxoSmithKline 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 owns shares of and has recommended GlaxoSmithKline. 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.

The stock was last 1% higher on the day after announcing that revenues grew 47% during January-June, to £11.9m, or 8% on an underlying basis. But the cloud computing specialist saw pre-tax losses swell to £1m from £770,000 a year earlier due to the impact of its ‘Nasstar 10-19’ restructuring programme.

Chief executive Nigel Redwood took a chipper tone, however, and commented: “The… programme has gained significant traction [in the first half] and I am delighted that we have seen the results of the initiatives materialise in these positive results, with Nasstar truly becoming one company in structure and name.” As a result trading in the first half of the year came in line with expectations.

Redwood added: “New business has been strong and I am pleased to see contracted recurring revenue continue to grow and especially encouraged by the proof of concept that we are currently engaged in for a 1,000 user organisation.

“This demonstrates further that our delivery model is becoming increasingly attractive to the upper quartile of the SME market place.”

Growth star

The company’s three-year Nasstar 10-19 strategy is designed to improve operational efficiencies and protect recurring revenues, a critical issue given the competitive nature of its industry. Repeated sales in the first half accounted for 90% of total turnover versus 88% in the corresponding 2016 period, and it secured new orders worth £139,000 of monthly recurring revenue in the period.

And the tech titan’s adjusted EBITDA margin increased to 22% of revenues from 20% previously, putting it closer to the 25% target Nasstar hopes to achieve by the close of 2019.

With Nasstar’s restructuring strategy clearly firing on all cylinders, the City expects the company to finally flip back into the black in 2017 after many years of profits failure, with earnings of 0.5p per share. This compares with last year’s losses of 0.3p.

And the bottom line is expected to keep on igniting, with a 20% improvement forecast in 2018, to 0.6p.

While Nasstar’s forward P/E ratio may look a tad toppy on paper — a reading of 19.2 times sails above the widely-regarded value watermark of 15 times — such multiples are not rare in the tech sector given the potential for brilliant profits growth. Indeed, I reckon the company is worthy of a close look right now.

Gaming great

Keywords Studios (LSE: KWS), like Nasstar, is another great growth stock dealing on heady valuations.

The company, which provides technical assistance to the world’s biggest video game developers, is predicted to generate earnings growth of 44% and 23% in 2017 and 2018 respectively. As a result, Keywords deals on a prospective earnings multiple of 49 times.

Still, the Dublin firm’s brilliant sales record could arguably make it worthy of such premiums. It saw revenues blast 50% higher between January and June, to €63.8m, a result that caused adjusted pre-tax profit to rise 60% year-on-year to €9.6m.

And I reckon its ambitious growth strategy (it is heavily engaged in M&A, and boosted its facilities in India and Japan in the first half) should keep revenues moving higher.

The post 2 under-the-radar growth stocks that could help you retire wealthy appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Keywords Studios. 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.

Improving performance

Reporting on Monday was provider of hosted managed and cloud computing services, Nasstar (LSE: NASA). Its trading for the full year was in line with expectations, with the company delivering a robust performance within its core division. This helped to offset the previously-disclosed underperformance of VESK-acquired assets.

For example, revenue increased by 36%, with the monthly recurring revenue run rate increasing 54%. The company was able to deliver a gross margin of 69% despite the effects of a weaker pound. This helped to push adjusted profit before tax up 13%, with a final dividend of 0.052p per share representing a 16% increase on the prior year.

Looking ahead, Nasstar is forecast to record a rise in its bottom line of 50% in the current year. Clearly, this is on an adjusted basis, with the company remaining loss-making on a reported basis in 2016. However, with a price-to-earnings growth (PEG) ratio of just 0.3, it seems to offer a wide margin of safety. This could help to protect its investors against any headwinds which may come to light. Therefore, while a relatively risky investment opportunity, it could also prove to be a profitable one.

Solid growth potential

Also offering upside potential in the long run is secure managed hosting and cloud services provider Iomart (LSE: IOM). In the last five years it has delivered a relatively impressive earnings growth profile, with its bottom line rising in four of the five years. Furthermore, its bottom line has grown at an annualised rate of almost 16% during the period, which indicates that its strategy has been sound.

Looking ahead, more growth is on the horizon. Iomart is expected to report a rise in its bottom line of 11% this year, followed by further growth of 8% next year. It trades on a PEG ratio of 1.9, which seems to be a fair price to pay given its consistent track record of profit growth.

For a smaller technology company, Iomart’s dividend appeal remains surprisingly high. It currently yields 1.9% from a dividend which is covered over three times by profit. This suggests that a higher dividend could be warranted in future, while also providing sufficient capital for reinvestment in the business.

With the cloud computing industry offering significant growth in the long term, Iomart seems to be well positioned to deliver high growth over a sustained period. As such, now could be an opportune moment to buy it.

The post 2 small-cap stocks that could deliver unbelievable earnings growth appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens has no position in any 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.