2 stellar small-caps that could make you brilliantly rich
Although cybersecurity may be the hotter topic these days, physical security of products and protection against counterfeiting remains a vital multi-billion pound business for multinationals the world over. That's why I have my eye on £50m market cap provider of banknote authentication and anti-counterfeiting systems Spectra Systems (LSE: SPSY).
The company began its life as a spin-out from the research of founder and CEO when he was a professor at Brown University in the US. Since then the company's focus has been on providing authentication systems and anti-counterfeiting devices for banknotes for 19 central banks across the world. While this has been a steady and sometimes profitable business, there have been a few changes of late that interest me.
The first is a renewed focus on profitability, which has entailed a cost-cutting drive, a move to in-house manufacturing of its covert materials products, and the acquisition of a company making the phosphor-based materials used by central banks in banknote production. This has led to a rapid uplift in financial performance with revenue rising 48% in the year to June to $7.1m and adjusted EBITDA hitting $3m. The company is also cash flow-positive and with no debt and $9.4m of cash on hand, it has begun paying out dividends and intends to return all cash in excess of $5m to shareholders.
The second thing that is interesting me is the company's push into authentication systems for physical goods such as luxury clothing and other items. Spectra has recently won regulatory approval to roll out its TruBand smartphone-based authentication system for cigarettes in China. If this trial goes well and Spectra is able to roll out the product to other goods and countries, its growth prospects are rather astonishing.
However, success is still far from certain and with the company's stock price up over 350% in the past year, a good deal of growth has already been factored-in. Would be-investors should do their homework and be cautious but I still see plenty of reason to be interested in Spectra Systems.
A bargain basement growth stock?
A much safer option is £240m market cap Alliance Pharma (LSE: APH). It takes a rather novel approach to business by avoiding expensive and hit-or-miss R&D in favour of simply acquiring already certified treatments and then doing what it does best, marketing them and finding distribution routes into new markets.
This has worked out very well for the company with revenue and EBITDA more than doubling last year, to £97.5m and £26m, respectively. Much of this growth was due to a large purchase, but previous acquisitions also continued to perform well with several growing by double-digits. With year-end net debt at 2.8 times EBITDA it'll probably be a while before the company makes further large acquisitions, but impressive second half cash flow was already pushing down leverage, so they will come eventually.
With its shares priced at just 12.8 times forward earnings while offering a decent 2.3% dividend yield, Alliance Pharma offers both a significant margin of error for investors and good growth prospects through organic expansion and further acquisitions.
But if Alliance Pharma is still too highly valued for your tastes, then I recommend reading the Motley Fool's free report on one Top Small Cap trading at just eight times earnings. This value investor favourite also comes with great growth pedigree as it has increased earnings by double-digits four years in a row.
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Ian Pierce has no position in any of the 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.