This small-cap could be undervalued by as much as 60%

Looking at the chart of WYG(LSE: WYG) it's hard to justify an investment case for the company. Over the past year shares in the consultancy group have declined by around 30% and over the previous two years, the shares have fallen 7%. However, while WYG's chart looks ugly, the company's underlying fundamentals tell a different story altogether.

Fundamentals are key

Today WYG reported full-year results to March 31 showing growth across the board. Revenues rose 14% year-on-year to £152m while pre-tax profit grew 17% to £8.2m on an adjusted basis. Thanks to one-off costs, headline earnings dipped to £1.6m from £2.2m.

These strong results come only a few days after WYG revealed that it had received deals worth around £50m over the next three years in the UK and Africa. Management has also notified the market that the company's role as a delivery partner with the Ministry of Defence is likely to grow, which could lead to a doubling in the revenues generated from a tie-up with the ministry's infrastructure arm.

It seems as if WYG is firing on all cylinders. Alongside today's figures, outgoing CEO Paul Hamer noted: "The opportunities we are seeing in our core consultancy services and international development markets, combined with our initiatives to drive efficiency...leave us in a strong position from which to deliver good growth in the current year."

City analysts are expecting yet another year of profits growth for the group with a pre-tax profit of £10.9m pencilled-in and earnings per share growth of 20% projected. If WYG hits these forecasts, management will have roughly doubled earnings per shares in five years, an impressive feat. What's more, during this period pre-tax profit will have grown fivefold from £1.8m.

Nonetheless, despite this impressive earnings growth, the market doesn't seem to believe in WYG's growth story. Indeed, at the time of writing the company is trading at a forward (to the year ending 31 March 2018) P/E multiple of 7.5. Considering that the company is generating mid-teens earnings growth, this bargain basement multiple seems unwarranted.

Lack of trust

So, what's behind the market's lack of trust? It appears that investors are worried about the ability for WYG to be able to continue to grow in its home market as uncertainties surrounding government austerity and Brexit prevail. Around 45% of the group's revenues come from outside of the UK, but contracts in Libya and Saudi Arabia have done little to assure investors that the group can continue to grow sustainably outside of the UK.

Still, management is set on trying to grow the business and at the beginning of the year, announced that WYG is putting itself up for sale in an attempt to grow faster. A large acquisition is also being considered.

According to the Financial Times, when Dutch outfit Arcadis bought WYG's London-listed peer Hyder Consulting in 2016, the bidder paid 12 times earnings. Applying the same valuation to WYG shares implies a share price of 164p (on estimated forward earnings per share of 13.7p). Put simply; it looks as if shares in WYG are seriously undervalued.

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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.

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