Two rapidly growing small-caps that could help you retire early

Stock market screen with rising arrow
Stock market screen with rising arrow

Since listing in October of 2015 financial technology provider Equiniti (LSE: EQN) has quietly flown under the radar of many investors despite its share price rocketing over 60% during this period. With a huge addressable market and reasonable valuation of 15.6 times forward earnings, I reckon this fast-growing small cap is one growth share that could turn into a bedrock share in many investors' retirement portfolios.

It provides back office software taking care of regulatory and compliance issues, payroll solutions, fund administration and employee share registration for the majority of the FTSE 100 and many smaller firms. These customers have flocked to Equiniti's software as it saves them money and many headaches by outsourcing back office functions that allows them to concentrate on their core business.

Top line growth in 2016 was a relatively disappointing 3.7%, but stripping out the expected slowdown in sales of public sector pension administration software, organic growth was a much healthier 6.8%. There is still significant room for growth as the company rolls out new offerings, pursues bolt-on acquisitions, increases cross-selling opportunities, and lands new clients.

On top of revenue growth, I'm also attracted to the sticky nature of Equiniti's products. Last year the company boasted 100% client retention and this stickiness should continue throughout the economic cycle as the group's software is mission-critical for customers. Recurring revenue of this sort is also highly profitable and helped boost pre-exceptional EBITDA margins from 23.4% to 24.2% last year. This led to EBITDA of £92.4m on the year from £382m in sales.

There is still plenty of room for positive margin improvement as the percentage of revenue spent on sales falls, and recurring revenue picks up. This will be necessary to tackle the £251m in net debt the company was saddled with at year-end thanks to its former private equity owner. With solid growth prospects, rising margins and non-cyclical sales, I reckon Equiniti is worth a closer look for investors with a long investing horizon.

A building boom equals booming profits

A more established growth share on my watch list is specialist rental business VP (LSE: VP). Results for the year to March saw the company grow earnings by double-digits for the fifth consecutive year.

The company has benefitted from strong macroeconomic growth at home and overseas that it has supplemented with strategic bolt-on acquisitions to add different niche capabilities and open up new geographic regions. Recently it spent A$20m on two Aussie and Kiwi firms and around £10m on two companies at home post-year-end.

Acquisitions together with positive organic growth in all of its markets, including in the very depressed oil & gas sector, led revenue to rise 19% year-on-year and EBITDA to jump 20% during the period. While some of these earnings are returned to shareholders through a 2.5% yielding dividend, the bulk are wisely re-invested for future growth in the aforementioned acquisitions and a net increase in fleet acquisitions from £28.7m to £40.9m.

While VP is obviously exposed to the health of the global economy, the company is in good shape with high cash flow and net debt just 1.3 times EBITDA. This conservative approach from management together with good growth prospects and a reasonable valuation of 11.6 times forward earnings put it firmly on my watch list.

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Ian Pierce 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.