Could this soaring small-cap stock become the next Capita plc?
Shares in small-cap outsourcer Servoca Plc(LSE: SVCA) are trading 24% higher in early deals this morning after the company published a short but upbeat trading statement.
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Specifically, the company (which is planning to announce its official interim results for the six months to 31 March on 12 June 2017) told investors this morning that "results for the first six months are ahead of internal expectations and significantly ahead of the corresponding period last year."
While there was no mention of what management's internal expectations for growth are within today's update, City analysts are currently expecting the group to report a pre-tax profit of £3.7m for the year ending 30 September 2017 and earnings per share of 2.4p, up 7% year-on-year. These forecasts will now likely be revised higher following today's statement.
Pushing higher
Today's positive trading update from Servoca is yet another step in the right direction for the company that has gone from strength to strength during the past five years. Analysts are expecting the group to report revenue of £79m for this fiscal year, up nearly 100% since 2012. Pre-tax profit is up 7,300% over the same period. Shareholders have reaped the rewards of this growth as since the beginning of 2012 shares in Servoca are up 445% excluding dividends. Including dividends, the shares have produced a total return of 535% over the period.
It looks as if Servoca's management has set its sights on turning the company into the next Capita(LSE: CPI) and at today's low valuation of only 9.7 times forward earnings, it could be the perfect time for investors to buy into this growth.
FTSE 100 growth champion
Until its problems emerged in 2015, Capita was one of the FTSE 100's greatest success stories. Between the beginning of 1999 and mid-2015, shares in Capita returned over 600% excluding dividends as earnings exploded.
Unfortunately, recent problems have curbed these gains and the shares are now up only 200%, but this should not detract from management's long term accomplishments.
Where Capita seems to have tripped up is with its generous dividend policy. The company appears to be paying out more than it can afford and as a result, growth has suffered while debt has risen. Servoca does not appear to be making the same mistake. This year the firm is set to pay out 0.4p per share in dividends, against earnings of 2.4p per share leaving plenty of room to retain profit for future growth. Unlike Capita, it looks as if Servoca is a highly conservative company as it is also returning cash to investors via share buybacks.
The bottom line
So overall, it looks as if Servoca is slowly working towards becoming one of the UK's top outsourcing companies, but as the company's journey is really only just starting, investors need to make sure they conduct their own detailed due diligence before initiating a position.
On the road to a million
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Rupert Hargreaves 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.
