Top six small-cap stocks for rest of 2018

by from interactive investor |

Equity markets are tricky right now, but one analyst has spotted half-a-dozen shares they think will prosper this year. Graeme Evans names them here.

Finding "standout opportunities" in the current climate is an increasingly challenging task, which is why Cantor Fitzgerald's higher conviction stock ideas for the rest of 2018 merit a closer look.

The list delves beyond the FTSE 100 and FTSE 250 to pick out some interesting plays further down the market spectrum.

The chosen six are floorings firm Victoria (household goods), Albert Technologies Ltd (technology), SIMEC Atlantis Energy Ltd (renewables and clean energy), Serica Energy (oil and gas), Wincanton (transport) and Diurnal Group (healthcare).

Victoria is the biggest in terms of market capitalisation, with a current value just below £1 billion. However, Cantor's Mark Photiades sees no reason why shares can't continue their impressive run of form to reach 960p.

That would compare with today's 826p and the 500p seen last summer. In 2014, the stock was just 30p but has taken off after five consecutive years of growth in underlying earnings per share, cash flow and operating margins.

The turnaround dates back to the appointment of executive chairman Geoff Wilding, who took over in 2013 after shareholders backed a boardroom coup. The company, which dates back to 1895 and has been listed since 1963, recently reported annual sales growth of 29% in UK and Europe, and 27% for Australia.

Photiades said:

"Given the forecasted 50% earnings per share growth in the coming year, we feel that Victoria offers considerable value at current levels."

For Cantor's technology analyst Kevin Ashton, his chosen stock is Albert Technologies. He described the company as the first mover in the field of AI-based marketing automation, having built a "game-changing" tool that optimises a marketing campaign's return on investment.

Ashton said:

"With ad spending coming back in house as brands reclaim their data, the market backdrop could not be more propitious."

In a recent trading update, Albert said revenues for the first half of 2018 were four times higher than a year earlier at about US$1.9 million. The underlying loss for the period will be around $6.4 million.

Shares are currently just below 40p, but Ashton believes they have the potential to double to 80p.

Turning to the renewable and clean energy sector, Cantor's alternative energy research analyst Adam Forsyth has chosen SIMEC Atlantis Energy as his pick.

The previous Atlantis business was originally a turbine supplier and project owner in the tidal power industry, including a majority ownership of MeyGen, currently the world's largest tidal current power project.

Now it's been joined by the Uskmouth power station in South Wales, as part of SIMEC Group taking a 49% stake in the newly combined business. Forsyth said plans to convert the power station from coal-fired to renewable energy showed that SIMEC Atlantis can offer "a diversified opportunity of scale".

He added:

"While the company has seen its share price slip lately, we have a target price of 75p. But if everything aligned for this business it has the potential to go above 300p."

Ashley Kelty, oil & gas research analyst, has been looking closely at the potential for Serica Energy after its recent submission of a field development plan for its Columbus project in the North Sea.

AIM-listed Serica, which recently struck a deal to buy the Bruce, Keith and Rhum assets in the North Sea from BP,  has a 50% interest in the Columbus development and is also its operator. 

The development plan provides for the supply of up to 40 million cubic feet of gas per day at peak to the UK gas market and 1,150 barrels per day of condensate and natural gas liquids.

Kelty said:

"With commodity prices remaining high and the OPEC deal providing support at current levels, we see the outlook for investors in the sector as remaining positive."

As Serica is cash generative and unencumbered by debt, he said the project should deliver strong cash flows to complement its existing portfolio of assets.  Shares are currently 69.5p but have a target price of 104p.

Robin Byde, transport research analyst, notes that Wincanton is currently trading at a discount to its peers in the supply chain sector.

However, the group has secured a number of important contract wins and renewals, including a new contract with EDF Energy to provide warehouse and transport services for the construction of Hinkley Point C nuclear power station.

Byde said:

"The group offers defensive earnings and solid cash generation in the UK supply chain sector, and having drifted recently on little news flow, we think this is a buying opportunity."

With an estimated full-year dividend yield of 4.1%, Cantor has a target price of 330p, compared with the current 266p.

The final stock is Diurnal, which is a UK-based speciality pharmaceuticals company focused on developing products for the life-long treatment of chronic endocrine conditions.

CEO Martin Whitaker has said he expects 2018 to be a transformational one for the company, with February’s marketing approval for Alkindi in Europe and the Phase III study into congenital adrenal hyperplasia product Chronocort.

Cantor healthcare research analyst Brian White said: “Europe represents the largest opportunity for Chronocort, with a total addressable market (EU and US) of more than $400 million.

"The US Phase III trial is scheduled to start in H2, and in total we believe that the value of Diurnal’s development programmes are targeting a marketing potential in excess of $10 billion."

His target price of 208p compares with a current price of 170p.

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