2 small-caps with excellent growth outlooks

Industrial chain manufacturer Renold(LSE: RNO) found itself on the back foot in Tuesday business following the release of full-year financials.

The stock was last 3% lower from the prior close and moving back towards last week's six-week troughs.

Renold announced that underlying revenues shrank 0.7% during the 12 months to March, dipping to £183.4m, while pre-tax profit dipped 9.5% to £6.7m.

Steady improvement

While last year's results may not appear great at face value, Renold has seen its sales teams become much busier in recent months as business conditions have improved. Indeed, the Manchester business saw underlying revenues grow 2.8% during the latter half of the fiscal year, swinging from a 4% drop in the first half of the period.

And Renold chief executive Robert Purcell commented that "markets stabilised during the year and there was a return to revenue growth in the second half... along with an increase in order intake."

Total orders rose 4.8% last year (or 1.9% on an underlying basis), thanks in no small part to exceptional recovery at the Chain division -- orders here surged 11.9% during the second fiscal half.

Off the chain

Although some trading difficulties remain, I have faith that Renold can keep sales on an upward trajectory as conditions in its key markets steadily improve and its STEP 2020 transformation plan (which has bolstered investment in marketing and commercial activities and led to massive restructuring) clicks through the gears.

The City certainly expects it to wave goodbye to recent earnings trouble from this year, and a 20% bottom-line advance is chalked-in for the period to March 2018. Another 12% rise is anticipated for fiscal 2019.

While the business is clearly not without risk, I believe its ultra-low valuations bake-in such troubles and leave plenty of potential upside. As well as dealing on a forward P/E ratio of 11.3 times (inside the widely-regarded value watermark of 15 times or under), a sub-1 PEG ratio (at 0.6) underlines the engineer's cheap price in relation to its growth prospects.

I believe recent share price weakness represents a fresh opportunity for savvy dip buyers to pile in.

Leading light

LED lighting specialist Dialight (LSE: DIA) is another recovery play setting itself up for ripping earnings expansion in the years ahead.

Although Dialight saw pre-tax losses narrow fractionally last year (to £3.8m from £3.9m previously), the company believes 2016 proved a watershed in returning it to growth. As well as bolstering its sales teams, increasing its distributor network and revamping its production model, Dialight is also investing heavily in its product ranges. It recently added the fast-growing industrial automation systems and so-called Internet of Things niches into its portfolio.

Like Renold, Dialight is also anticipated to deliver roaring double-digit earnings growth in the years ahead. A 36% advance is chalked-in for 2017, and an extra 42% increase is predicted for next year.

And while a prospective P/E ratio of 28.9 times is clearly toppy, I reckon investors should pay close attention to a PEG rating of 0.8. I reckon Dialight is a great pick for those seeking growth at bargain basement prices.

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Royston Wild 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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