10 good value growth companies

So how do you discriminate between the companies that have got in their genes the DNA of enduring profit growth, and those that may just end up a flash in the pan? It isn't easy. Still, there are certain characteristics of growth that can be seen quite early on, and I have selected a list of 10 to match them (see The signifiers of growth). I have screened for strong recent share price performance, and positive analyst views, though in many cases the coverage is thin. I looked for companies where debt was either small and/or falling, and I have excluded any companies where PE ratios are high enough to fully discount growth possibilities. We are, after all, looking for value in our growth. If there is no scope for further re-rating, one of the prime movers is lost. Perhaps surprisingly, only one does not pay a dividend.

Of course, all this is only a starting point for further research. With few of these companies well known, there is no substitute for reading the annual report and listing documents, scouring the RNS record, and applying a healthy dose of scepticism to assumptions of growth. If that takes out eight of every 10 likely candidates, that is no bad thing. What is left will emerge all the stronger.

21st Century Technology

21st Century Technology is a supplier of CCTV and other monitoring equipment for public transport, both on vehicles and in premises. Advances in security and monitoring equipment not only make the public feel safer, but can help substitute for more expensive staff. The company is already well established as preferred supplier to Arriva and GoAhead Group, and also has business with FirstGroup, which are collectively the largest public listed company operators of public transport in the UK. This is certainly a growth market, although it isn’t without competition. The company has not only produced tremendous revenue growth since 2008, but has turned £4m of debts into £3m of net cash over the period. Operating margins are a healthy 11 per cent, and return on equity nearly 13 per cent.

GVC

Luxembourg incorporated, but with staff mostly in Israel and Malta, GVC is an odd beast, tiptoeing through the riskier and most uncertain end of the gambling market. However, it is very cheap, offers a huge prospective dividend yield of 11 per cent, and has managed five years of consistent revenue growth. Its main brand, CasinoClub, has operated in German-speaking markets since 2001. However the growth seems to be in Betboo, active mainly in Brazil, plus a gradual move to offering back-office services to other companies within the industry. Betaland, focused on Italy, has recently been sold. GVC has no exposure to the most legally tricky market of all, the US. However well-managed, the company operates in an uncertain industry and thus rates a speculative buy rating.

Judges Scientific

Judges is an Aim-traded maker of instruments, many of them for testing items such as fibre optics. This seems to be a profitable niche because the company has a continuous record of higher revenues and dividend payments. The shares have stormed ahead, from 100p to 600p since the start of 2009, but still trade on just 10 times house broker Shore Capital's estimate for the current year. Definitely worth a closer look.

Lombard Risk Management

An Aim-traded minnow, worth just £17m, Lombard Risk Management provides risk analysis and compliance software for banks, including compliance with the Dodd-Frank Act and the coming Basel III rules. The company may have a limited track record, but it claims half the banks operating in the UK as customers, and announced four contract wins last month. This month's final results showed a jump in pre-tax profit to £2.5m from £0.6m and EPS of 1.2p. With the price at 9p, that's not very demanding for a company that has already seen some bid interest last July, reportedly at 20p. Perhaps the biggest snag is the perennial penny share problem, a 0.5p spread.

Murgitroyd

This Aim-traded patent law firm is riding the crest of a wave in awareness about the importance and value of intellectual property. The company specialises in filings for the European market. Nearly half those still come from companies in North America and East Asia, which want to defend their IP rights in Europe. One factor to watch is competition from private law firms, where in the past fee erosion has been seen, but overall this is just the kind of niche that could provide long-term growth. Moreover, Murgitroyd is the only listed pure play in the arena. As such a forward PE of 12 isn't bad at all.

Porvair

Main-market listed filtration specialist Porvair is perhaps not completely unknown to small-cap fans. However, after a rough patch in 2008 it has improved its margins by shifting manufacture to China, and had some significant contract wins from Boeing and steel firm POSCO. Consistent growth in earnings and a halving of net debts have reinforced the profit powerhouse, and helped the shares close in on the peaks made a year ago. With earnings upgrades, the forward PE ratio doesn't look bad at 14 times.

Red24

Shares in Aim-traded security company Red24 have quintupled since 2008, with higher profits, the start of dividend payments and accumulating cash underlining the attractions. The company, which has roots in both South Africa and the UK, offers a variety of security services from close personal protection right through to crisis management for assets, brands and reputation. Although there is plenty of competition in the area, the company has clearly built a reputation, helped by the broad experience of chief executive Maldwyn Worsley-Tonks, who is a retired lieutenant-colonel from the Parachute Regiment. For all that, the PE ratio is only eight.

Solid State

This Aim-traded electronics distributor specialises in high-end performance critical and ruggedised industrial products, for environmental, medical, aerospace, oil and gas markets. Those specialist niches provide the economic moat that has allowed this company's shares to soar almost 10-fold since the start of 2009. However, that isn't the only attraction. Solid State shoulders a hefty yield of over 3 per cent, and a payout that has been increasing sharply. Given that management owns 70 per cent of the shares that may not be surprising. There is significant debt, but still less than a third of total capital, and the PE ratio is less than 12, which makes the shares good value.

Walker Greenbank

Investors in luxury goods need to think outside the handbag. While Louis Vuitton, Burberry, Mulberry and Coach are premium-rated companies addressing the designer needs of the newly wealthy, some companies are doing equally well in premium-end home furnishings. Walker Greenbank, whose shares have soared six-fold in three years, is just such a company. Its high-end Zoffany wall coverings, one brand among many, are bought by the affluent from Chelsea to Dubai, and its international expansion is coming on apace. Yet with a PE ratio of less than 11, this is a cheap way to access a market whose growth is set to continue.

William Sinclair

Fast-growing smaller companies are often dominated by technology plays, or oil and gas explorers. Sometimes it is good to find a company that is a major player in an industry that is neither hard to understand, nor subject to rapid change. Garden products supplier William Sinclair is one such company, and despite soaring earnings and an almost trebled share price in three years, it still isn't expensive against earnings. The main engine of growth has been the company's energetic rebalancing of its business away from natural peat in line with government environmental rules. For one of the pre-eminent suppliers of growing media for plants, it isn't surprising to discover that the company has a healthy yield of 3 per cent.

How growth and rating propel shares