Renew has carved out a niche for itself delivering essential infrastructure maintenance tasks for regulated markets within the UK. As well as organic growth, the company has grown through acquisitions. For example, last November it acquired Giffen, a specialist mechanical, electrical and power services provider in the rail market.

And despite the headwinds buffeting the broader UK construction and engineering industry, it seems Renew’s specialist focus and reputation is helping the company stay ahead of its peers. 

Ahead of the game

According to a trading update issued by the firm today, in advance of its interim results for the half year ended 31 March, the performance of the group “continues to be strong” with current trading in line with management expectations. The update also mentions Renew is currently seeing an “increased forward order book.“

Unfortunately, the release does not detail management expectations for growth, but according to City analysts, for fiscal 2018, Renew could report a 15.1% increase in earnings per share for the year to 34.2p. This target implies that the shares are currently trading at a forward P/E of 11.1. 

In my view, this valuation severely undervalues the company and its prospects, and it does not seem to take into account Renew’s historical record of earnings growth. Over the past six years, normalised earnings per share have risen by 130%.

Changing of the guard

I believe part of the reason for the company’s low valuation is the fact that the business is currently in the process of a management transition. The team that has led the firm over the past decade has stepped aside to make way for new blood. 

In September 2016, chief executive Brian May was replaced by insider Paul Scott, head of Renew’s engineering division and at the end of last year, finance director John Samuel was replaced by Sean Wyndham-Quinn, previously an advisor for the firm for nearly a decade.

The promotion of insiders should help smooth the transition, and it looks as if, so far, everything is going to plan. 

Cash-rich

The company is also benefitting from the fact that it has a small, positive net cash balance, although due to the timing of cash flows, management expects to report a “modest” net debt balance for the period ending 31 March. Still, unlike some of its peers in the construction and engineering sector, Renew is cash-rich, and conservative administration of the business has allowed it to maintain a healthy balance sheet while expanding through acquisitions. 

Moreover, robust cash generation has allowed the company to triple its dividend distribution to investors over the past six years. Today, shares in Renew support a dividend yield of 2.6%, and the payout is covered 3.5 times by earnings per share. As earnings continue to rise, I believe the company’s dividend will head in the same direction. 

So overall, as the next generation of management steps up, and the group builds on its existing strengths, organically and via acquisitions, I believe Renew will continue to produce market-beating returns for investors. 

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Rupert Hargreaves owns no share 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.

Adventurous small-caps

Much depends on your personality. If you’re willing to stomach the potentially devastating losses that can be incurred when investing in small-caps, then good for you, but small-cap investing isn’t for everyone. Personally I’ve always championed the idea of building a well-diversified portfolio comprising a nice balance of defensive blue-chips and more exciting and adventurous smaller firms. But as always, if you want to retire early, you have to pick the right stocks.

Many of London’s smaller listed companies have yet to prove themselves by actually turning a profit, let alone showing signs of long-term growth potential. And that’s particularly true of the junior AIM market, where many oil & gas exploration, mining and pharmaceutical minnows are nothing more than highly speculative bets. But if you’re willing to dig deep enough, there are plenty of quality businesses just waiting to be discovered.

Ninefold increase

Take Renew Holdings (LSE: RNWH) for example. The AIM-listed engineering services group has not only proven it can turn a healthy profit, but has grown its market capitalisation more than ninefold since September 2005 without recourse to new equity.

The Leeds-based group operates a number of autonomous subsidiary businesses which provide essential engineering services to maintain and renew UK infrastructure networks. These independently branded businesses have expert knowledge in their individual markets and directly deliver engineering services aligned to the needs of clients, many of whom are responsible for the long-term maintenance and renewal of national infrastructure networks.

Strong results

In its last completed financial year, the group delivered another strong set of results reflecting the company’s position as a leading provider of engineering services to many of the UK’s critical infrastructure assets and in particular the nuclear, rail and water markets.

Group revenue (including £2.2m from a joint venture) increased by 6.7% to £560.8m, with adjusted pre-tax profits up 13.1% to £25.2m, compared to £22.3m reported for the year before. At the end of the 2017 financial year, the group’s order book stood at a healthy £511m, with a net cash position of £3.9m after the acquisition of Giffen Holdings for £7.2m during the year.

High barriers to entry

Renew’s share price has enjoyed spectacular growth over the past decade or so, but I think there’s plenty more to come from this £250m small-cap . The regulated markets in which the company operates have high barriers to entry and, alongside the group’s extensive expertise in delivering asset care and maintenance, provide strong opportunities for long-term growth.

I believe the recent sell-off is unjustified with management confirming it has no financial exposure to Carillion. Herein lies a good opportunity for contrarians to buy on weakness at just 10 times current year earnings. Income seekers may turn their noses up at the relatively modest dividend yield of 2.7%, but payouts are covered more than three times by forecast earnings, leaving plenty of room for hefty hikes in the future.

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Bilaal Mohamed 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.

Taking out the competition

Last week, the global marketplace provider for online food delivery announced that the Competition and Markets Authority (CMA) has unconditionally cleared the company’s proposed acquisition of German-owned Hungryhouse. Vacuuming up the competition in that way strikes me as a sure sign of a business with strong strategic and operational momentum. Indeed, City analysts following Just Eat expect earnings to expand by a blistering 37% this year and 39% next year, which is stonking growth. So what’s my problem with the firm?

Well, despite all the evidence of the company’s success, I can’t get my mind to hang comfortably around the business model. I’d never dream of using the service myself, preferring to ring my favourite takeaway directly to order. I can see the benefits for those travelling who don’t know the local takeaway scene, but still perceive the business model as being fragile in my own head. Maybe the problem is mine and mine alone, but I’m not prepared to pay for the current forward price-to-earnings (P/E) ratio for 2018 running close to 35.

That said, the stock seems locked in a clear uptrend and there’s no sign of growth in earnings slowing, so maybe you should ignore me and do your own research. Meanwhile, I’ll turn my attention to engineering services and specialist building provider Renew Holdings (RNWH), which released its full-year results today.

Defensive qualities

I like the company because it seems to have a defensive element to its business. More than 80% of revenue and 90% of operating profit come from the nuclear and conventional energy sectors, and from the environmental and infrastructure markets. The directors say these areas are “governed by regulation and benefit from non-discretionary spend with long-term visibility of committed funding.” The firm earns the remaining 10% of its income from the high-quality residential building market in London and the home counties.

The figures today are good, though not as spectacular as those we’ve become used to from Just Eat. Revenue rose 7% compared to a year ago, adjusted earnings per share lifted a decent-looking 22% and the order book stands 4% higher at £438m. The directors expressed their ongoing confidence in the outlook by pushing up the dividend by 12.5% — nice!

The current share price of around 426p throws up a forward P/E rating of 12.5 for the year to September 2018, which I find much more comfortable than Just Eat’s rating. There’s also a forward dividend yielding almost 2.5% and forward earnings look set to cover the payment more than three times. The company is doing a good job of growing the dividend payment, which is up 150% over the past four years. If dividend growth continues in the future, Renew Holdings could end up performing well as a stock from here.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Just Eat. 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.

Major transition

The FTSE 100 giant has been undergoing a major transition since the £84bn sale of its 45% stake in Verizon Wireless in 2014. Its £6.5bn acquisition of Kabel Deutschland and £6bn acquisition of Spain’s Ono, either side of the sale, and a massive £20bn investment project across the group have been major components in a platform to rebuild the earnings from Verizon that it exchanged for £84bn.

The shares have traded in a range around 200p to 220p for much of the last few years, spiking up to 240p+ a few times in the months after the Verizon sale when it looked like Vodafone might be ripe for receiving a bid or engaging in a merger. However, as speculation receded, the shares have settled into the narrower range. Through this period the price-to-earnings (P/E) ratio has been above 30 (nearer 40 at times), with the market evidently confident that earnings growth would come through in due course and seeing an annual dividend yield in excess of 5% as fair compensation while waiting.

Earnings turnaround

Strong earnings growth is now starting to come through, with the company reporting a 17% increase in underlying earnings per share (EPS) for its financial year ended 31 March 2017. The City consensus is for annual EPS growth of around 12% for the foreseeable future. With rising EPS now rushing over the horizon but with the share price still in the 200p to 220p range (currently 209p), the P/E is rapidly falling. It’s 26 for the company’s current financial year, down to 24 for fiscal 2019. Meanwhile, the dividend, which is now supported by rising free cash flow, offers a yield of over 6%.

As Vodafone begins to ‘grow into’ its P/E there will come a point when the shares begin to rise. That may be a while yet but with the annual yield now over that 6% figure, the shares look very buyable to me today for investors with a little patience.

Record results time and again

Renew Holdings (LSE: RNWH) has seen a massive turnaround in earnings since its nadir in the 2008/9 recession. The provider of engineering services in regulated UK infrastructure markets has posted record result after record result in recent years.

It said in a brief update today that it expects to report figures for its financial year ended 30 September “in line with market expectations, delivering an increase in operating margin alongside growth in both revenue and operating profit. The board also expects to report that the group has moved to a net cash position.”

Its shares are trading up 4p at 414p, valuing this AIM-listed company at near to £260m. With City expectations of a 17% rise in EPS to 30p, the P/E is a reasonable 13.8 and the price-to-earnings growth (PEG) ratio of 0.8 is nicely on the value side of the PEG fair-value marker of one. As such, I rate the stock a ‘buy’.

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G A Chester 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.

With that in mind, here are two shares which could prove to have been dirt cheap at the present time.

Growth potential

Engineering services company Renew Holdings (LSE: RNWH) continues to post steady growth numbers. In its most recent update, the company recorded a rise in revenue of 9% and an increase in adjusted operating profit of 15%. Much of this growth was due to the company’s current strategy, which is well-established and has focused on improving the operating margin. It increased by 30 basis points to 4.2% in the most recent half year results, which means the company is on target to meet its target of 4.5% for the year.

Strong top and bottom-line growth means that Renew’s dividend growth is also relatively high. Dividends per share moved 13% higher in the first half of the year, while in the next two years they are due to rise at a similar pace. This puts the company’s shares on a forward dividend yield of 2.3% and since shareholder payouts are covered three times by profit, there could be more double-digit growth ahead.

With a price-to-earnings growth (PEG) ratio of 0.8, Renew seems to offer growth at a reasonable price. Therefore, while the outlook for the UK economy may be somewhat uncertain at the present time, in the long run its share price rise could be impressive.

All-round opportunity

Also offering a potent mixture of growth, value and income appeal is construction and regeneration company Morgan Sindall (LSE: MGNS). It is expected to record a rise in earnings of 14% in the current year, followed by further growth of 10% next year. This puts it on a PEG ratio of only 1.1, which suggests that more capital gains could be on the cards after the 65% rise recorded since the start of the year.

As well as growth appeal, Morgan Sindall may also be a worthwhile holding for income investors. It has a dividend yield of 3.2%, and since dividends are covered 2.4 times, they could realistically rise rapidly in future years. In fact, it would be unsurprising for Morgan Sindall’s dividend growth rate to beat inflation as a result of its forecast for high net profit rises and relatively low payout ratio.

As such, with share prices being high and inflation also rising, Morgan Sindall could be the right stock to own over the long run for both capital growth and income investors

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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.

With this in mind, I’m taking a look at two small-cap stocks with serious upside potential.

Buy and build

Scientific instrument specialist Judges Scientific (LSE: JDG) is a turnaround play which ambitious investors should keep an eye out for.

The core of the company’s business model is to buy and build a portfolio of scientific instrument businesses. Growth is being pursued by a combination of the pursuit of organic growth from existing businesses and through the acquisition of top-quality businesses with established reputations in specialist niches.

Although the past two years had been a tough time for the company, as growth in earnings and cash flow languished, the company is showing a number of signs that things could soon take a turn for the better. Despite a sluggish start to the year, trading picked up in the second half of 2016, with overall organic order intake up 2.9% compared with 2015.

Looking ahead, profitability is expected to improve as it addresses the production challenges in one of its businesses, which has primarily been the cause of the company’s recent weak financial performance. The company is also set to benefit from sterling’s relative weakness as the group earns a majority of its revenues from overseas, but its costs are predominately UK-based and are largely denominated in sterling.

What’s more, the long-term fundamentals of the scientific instrumentation sector remain intact, with demand likely to continue to grow due to increased investment in higher education and a growing trend towards optimisation across science and industry.

As City analysts expect the company to increase its earnings by 24% this year, investors would likely gain confidence in its turnaround prospects. Judges is currently attractively valued, with shares in the company trading at 15.2 times expected earnings this year (or 13.7 times expected earnings for 2018).

Infrastructure

Meanwhile, construction and engineering services company Renew Holdings (LSE: RNWH) could be set to benefit from an improving infrastructure spending outlook in the UK. The company has extensive expertise in the water, telecoms, transport and energy sectors and is well-placed to gain market share in the regulated infrastructure markets.

The company’s interim results this week show Renew is making solid progress. Revenue in the six months to 31 March 2017 increased 9%, while operating profit jumped by 14% to £12.1m. This enabled it to hike its interim dividend by 13% to 2.65p per share, giving its shares a current yield of 1.9%.

With management confident that it can lift the group’s operating margin to 4.5%, from 4.2% currently, I expect earnings to outpace revenue growth again this year. Renew seems reasonably priced, with shares in the company trading at 14.3 times expected earnings this year, which compares favourably to the sector average of 17.4.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Judges Scientific. 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.

Since then we’ve seen a 36% gain, which could be partly down to the likelihood of some economic stimulus through infrastructure expenditure — infrastructure engineering is what Renew does, and it’s focused 100% on the UK market, so that looks promising to me.

Continued success

Full-year results today showed a 14% rise in adjusted pre-tax profit to £22.3m, with basic earnings per share up 10% to 23.53p.

The dividend was hiked by 14% to 8p per share for a yield of 2%, which supports the firm’s recent progressive policy — forecasts suggest 9p per share, which would represent a trebling in just six years. And I can’t see that failing any time soon as the dividend is backed by strong cash flow this year, which saw the company swing from net debt to net cash of £4.8m.

The firm has a new chief executive in the shape of Paul Scott, and chairman R J Harrison OBE reckons the board is “confident of delivering further growth and continued success” under his leadership.

Renew has shown good PEG valuations in recent years, and though forecasts suggest a bit of a rise to 0.7 in the coming year, I think that’s still within an attractive growth range. With a forward P/E of 12.3, I can see a small cap growth opportunity here — and with a market cap of £240m company, I don’t think the risks are too great.

Smart money?

New technology can be profitable, and Smart Metering Systems (LSE: SMS) seems to be doing well from it after having recorded several years of double-digit earnings growth. The firm, which provides entire metering and management systems to energy suppliers, has also enjoyed an impressive share price growth of 487% over the past five years to today’s 600p, but is there any more to come?

I think there could be, and while we’re looking at a forward P/E of 30 for this year (dropping to 26 for 2017), the shares have been valued at the kind of level for the past few years while earnings have been climbing.

At the interim stage reported in September, the company revealed a 25% rise in revenue to £32.3m, and told us that it “now manages over 1 million utility metering and data assets on behalf of energy suppliers in the industrial and commercial and domestic markets“. That might sound like a lot, but it’s really just a small inroad into the total number of gas and electricity meters out there, and the roll-out of smart metering is still in its infancy.

Smart Metering has made some key acquisitions and has signed some important new contracts, and I can see attractive potential for a good few more years of earnings growth.

But that does come with a significant caution, from that high share price valuation. I’d say the shares are priced near the top end of their likely growth valuation, and if we see any sign of less-then-stellar growth we could see investors jumping ship — but if you can handle a bit of volatility, you might want to take a closer look.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Smart Metering Systems. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Whether the investment is in railways, highways or power plants, one major beneficiary will be Renew Holdings (LSE: RNWH). Renew owns a variety of subsidiaries that provide engineering and long-term support services for a variety of customers including Network Rail, major utilities and telecoms.

While there are plenty of companies out there that would benefit from major infrastructure investments such as construction firms or materials manufacturers, Renew has several characteristics that make it an attractive long-term investment to me.

First, by making maintenance services contracts a large part of its business, Renew protects its downside by ensuring long-term revenue visibility throughout the business cycle. This is evident in the order book, which increased 9% year-on-year over the past six months to £515m, roughly equal to full-year 2015 revenue.

Second, Renew has a very healthy balance sheet. Net debt at the end of the last reporting period stood at a very low £4.2m and the company expects to have net cash at the end of the year. Having low or no debt to service further protects the company during economic downturns and also gives Renew ammunition for acquisitions.

With revenue growing even without a major government-led investment push, operating margins increasing consistently and a healthy balance sheet, Renew is one cyclical on my watch list come the next eventual economic downturn.

Big is beautiful?

One company that would benefit more directly from any infrastructure-dominated stimulus plan is Irish construction giant CRH (LSE: CRH). While CRH has contracts stretching across the globe roughly half its sales are in Europe with the UK a major market.

CRH provides materials for construction companies ranging from cement and asphalt to fencing and shutters. This is undeniably a highly cyclical business but CRH has a few competitive advantages that most competitors don’t enjoy.

Most important among these is the company’s sheer size. With annual revenue topping €23bn last year, CRH benefits from the operational efficiencies of its massive scale. Combining back office operations and maintaining dominance in a wide range of local markets helped boost operating margins to 4.6% for the past six months.

Geographic diversification also provides some insulation against a downturn in a single market. Of course, the downside to being in more than 20 countries and being so large is that it’s rather difficult to increase sales enough to provide significant organic growth.

That’s why CRH is highly acquisitive. The latest splurge was last year’s $6.5bn purchase of regulator-mandated divestments from Lafarge and Holcim related to their merger. These new assets helped boost revenue by a full 35% year-on-year over the past six months.

There are many other construction materials companies out there, but CRH’s proven ability to make large acquisitions work for shareholders, intense focus on margin improvement, geographic reach and steadily increasing dividends make for a high quality company whatever path Theresa May takes.

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With shares in Renew Holdings (LSE: RNWH) rising by around 9% today, it must seem as though the company’s growth prospects are extremely bright. That’s because with Renew Holdings being focused on UK infrastructure and its development, a rise in support for remaining in the EU (according to opinion polls) means that its near-term future is arguably a little more certain.

However, the referendum vote could still go either way and, as a result, Renew Holdings’ share price is likely to be volatile in the short run and could realistically move significantly in either direction.

In the long run, Renew Holdings seems to offer an appealing risk/reward ratio. That’s because it has bright growth prospects and yet trades on a relatively low valuation. For example, Renew Holdings is forecast to increase its bottom line by 5% in the current year and by a further 13% next year.

Despite this, it has a price-to-earnings growth (PEG) ratio of 0.8, which indicates that for investors who can live with above average volatility, it could prove to be a sound buy. Although a doubling of its share price may be some years away, Renew Holdings could deliver sizeable returns moving forward.

Favourable outlook

Also offering upbeat earnings growth prospects is mobile and online payment specialist SafeCharge (LSE: SCH). It is forecast to increase its bottom line by 37% in the current year and by a further 14% next year following a disappointing 2015 where its net profit fell by 2%. As a result of this downbeat past performance, SafeCharge’s shares have fallen by 21% in the last year as investor sentiment towards the company has weakened.

This fall in valuation presents an opportunity for long term investors to buy in at a discounted price. The mobile payments solutions space offers a favourable outlook as it become more prevalent and with SafeCharge trading on a PEG ratio of 1, it appears to offer strong growth at a very reasonable price.

Certainly, it is a smaller company which could have a somewhat volatile share price, but for less risk averse investors it now looks set to perform well as an investment. This doesn’t mean that it will necessarily double in value, but it does mean that its risk/reward ratio is relatively favourable.

A long way to go

Meanwhile, Sirius Minerals (LSE: SXX) has been a surprisingly strong performer in 2016, with its shares having risen by 19% year-to-date. Part of the reason for this has been improved sentiment towards the wider mining sector and this bodes well for Sirius Minerals’ financing requirements. On this front, Sirius Minerals is a somewhat risky proposition since it requires major fundraising to pay for its proposed £1bn+ potash mine in York.

With the outlook for commodity prices now being rather more positive than it was a number of months ago, Sirius Minerals may find it easier to generate the funds required. However, a failure to do so or a commodity price collapse akin to that seen in recent years could cause Sirius Minerals’ shares to come under severe pressure.

Clearly, in the long run they have the potential to double, but there is a long way to go before Sirius Minerals becomes a profitable entity. Therefore, it may be prudent to invest elsewhere – especially with a number of bargains being around in the stock market at the present time.

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For example, it’s making asset disposals, reducing the leverage on its balance sheet and is set to become a much more profitable business over the medium term. In addition, Glencore is forecast to return to profitability in the current financial year and to then increase its bottom line by around 45% next year. This puts it on a forward price-to-earnings (P/E) ratio of 22.8 and while this is relatively high, further earnings growth could be on the cards.

Clearly, Glencore’s bottom line is heavily dependent on commodity prices, but with it having a sound strategy and upbeat near-term prospects it could continue to beat the FTSE 100 over the medium-to-long term.

Future income play

Shares in Renew Holdings (LSE: RNWH) have also beaten the FTSE 100 in recent months, with them being up by 14% versus a fall of 12% for the wider index over the past year. A key reason for this could be that the engineering services company is expected to record upbeat growth numbers over the next two years, with Renew’s bottom line forecast to rise by 5% in the current year and then by a further 13% next year.

While Renew has strong growth potential, its shares seem to offer significant upside prospects. That’s because they trade on a price-to-earnings growth (PEG) ratio of just 0.9 and with Renew paying out only 29% of its profit as a dividend, there’s also scope for a rapid rise in shareholder payouts. This means that while Renew currently yields just 2.2%, it could become a much more appealing income play over the medium-to-long term.

Look elsewhere

Meanwhile, shares in RM2 International (LSE: RM2) have disappointed in the last year, with the pallet designer and manufacturer recording a fall of 62%. Clearly, it’s always difficult to catch a falling knife and with RM2 having been lossmaking in each of the last three years, it’s little surprise that investor sentiment is relatively weak. That’s especially the case since there are a number of other smaller companies that offer upbeat growth prospects at relatively appealing prices.

While RM2 has the potential to turn its financial performance around, it may take time to come good. That’s despite it announcing in the most recent interim results that it has signed contracts with 15 customers and the fact that it’s debt-free. As such, for risk-averse investors there seem to be better options available elsewhere.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.