Four small-cap stocks for 2014 and beyond - part two

With investors always on the lookout for stocks with upside potential, analysts from Panmure Gordon have compiled a list of small-cap stocks which they expect to outperform the market in 2014 and beyond. The first four stocks were outlined in Wednesday's article, but which four complete the list?

First Derivatives

Software and consulting services business First Derivatives has been on the scene since 1996, but Panmure Gordon analysts Adam Lawson and George O'Connor believe it was only last year that their proposition became attractive.

"2013 was the year that the market began to believe in First Derivatives' potential to become a leading provider of software to the financial services industry globally, thanks to landmark deals with ASIC, NYSE Technologies and Mizuho," the analysts say.

"These deals created ripples in underlying customer markets, and we fully expect these ripples to turn into a flood of demand in 2014."

First Derivatives supplies both consulting services and its newly-developed Delta software to financial services companies, and chief financial officer Graham Ferguson believes its success lies in becoming "critical" to its clients because it is so "involved in their infrastructure".

The company is now undergoing a "substantial re-rating" and Lawson and O'Connor expect this to continue into 2014, with First Derivatives' EV/EBITDA multiple expected to stand at 23.2 times in 2014 from 25.6 times in 2013.

Panmure Gordon has a 1,458p price target on the stock.

Johnston Press

Bucking the trend seen across many other media companies, "the Johnston Press story remains very attractive in our view," begins Panmure Gordon's Alex DeGroote. He has a number of justifications for this statement, including "de-leveraging, top-line recovery, relative profit stability, digital, and refinancing".

CEO Ashley Highfield has implemented a comprehensive restructure of the business since joining two years ago, with an aggressive cost-cutting programme (including a 40% reduction in the number of employees), a relaunch of many of Johnston's papers, and a move into digital.

"It is worth pointing out the Midland (the largest publishing unit) reached a key milestone in September, namely where the local digital revenues exceeded local print revenues," says DeGroote.

But the company is still saddled with a huge amount of debt, £307.3 million in September 2013, although this is down from £386.7 million when Highfield joined. He hopes to tackle this further in 2014 through a potential re-financing scheme which could decrease the interest rate and include a £25 million incentive.

"The share price of Johnston Press was around 4p when I joined," Highfield says. "It's around 16.5p today, and hopefully it will quadruple again over the next four years."

DeGroote's price target does not show quite such confidence in the stock, but at 25p it still represents hope for a hefty increase in value.

Lionstrust Asset Management

After a disastrous period following the financial crisis, compounded by the loss of two of its star fund managers in 2009, Panmure Gordon's Keith Baird believes that Lionstrust Asset Management is finally back on the rise.

"As a small active asset manager, Lionstrust is highly geared to growth in the context of the continuing equity bull market," he comments. "We expect improving fund flows and positive markets to drive both assets under management and profit growth."

Baird expects Lionstrust to end 2014 with £4 billion in assets under management, but chief executive John Ions is determined to achieve this without attempting "to be all things to all men".

Instead, he says: "Our strategy is to add value in the areas in which we operate."

In particular he is focused on the "fast-growth" asset classes, including global equities and global emerging markets. Hopefully this focus will help Lionstrust to achieve the 37% upside implied by Baird's 336p price target.

Regenersis

Support services company Regenersis focuses on repair and refurbishment solutions for consumer electronics including mobile phones, laptops and set-top boxes, and Panmure Gordon's Paul Jones and Mike Allen believe it has the potential to dominate the market in 2014.

"We believe Regenersis is in something of a sweet spot, with an increasing range of capabilities on offer which can enable customers to both reduce costs and ease logistical challenges as they use Regenersis more extensively," they comment.

"We believe this offer is unique, and in a market where the focus for many original equipment manufacturers has become efficiency improvement and cost reduction rather than market growth we anticipate that this could be an increasingly attractive proposition.

The analysts have strong forecasts for Regenersis's sales and profit growth, with sales expected to be up to £217.2 million in 2014 from £179.7 million in 2013, and pre-tax profit up to £10.6 million in 2014 from £6.5 million in 2013. This takes only growth from existing contracts into account, and therefore further upside potential is possible.

"While the shares performed well during 2013 through increasing appreciation of the improvements delivered under the current management team, we believe the rating still fails to reflect what could be supernormal growth levels as market share increases," Jones and O'Connor conclude, placing a 402p price target on the stock.