2 exciting growth stocks with massive potential

Safestore Holdings

Today, I’m looking at the investment case of two small-cap growth stocks.

Organic sales growth

Zotefoams (LSE: ZTF), a chemicals company which manufactures polymer foams for automotive, aerospace and industrial uses, looks poised to benefit from big investments over recent years.

Zotefoams recently acquired full ownership of its Chinese joint venture, Kunshan Zotek King Lai, which underscores the company’s confidence in the growth potential of T-Fit clean-room products and its ambition to extend the range of products under the T-Fit brand in the coming years.

The company is seeing strong trading across multiple markets, with full-year results showing continued margin improvement and strong organic growth for high performance products, despite softer-than-expected demand from Europe and the UK. And while North America was the standout performer in 2016, Zotefoams also made steady progress in the rest of the world — and, in particular China.

Overall, group revenue increased by 7% to £57.38m, with underlying pre-tax earnings up 20% to £7.23m, thanks to an improving sales mix and weaker sterling. Looking forward, City analysts expect underlying earnings to grow by 15% in 2017, with a further 17% expansion pencilled-in for 2018. Shares in Zotefoams have already risen by 16% since the start of the year, and the company now trades at 16.2 times its 2018 forecast earnings.

Given the huge organic opportunities opening up to the business and the company’s unique IP strength, I reckon valuations seem reasonable for a stock with double-digit earnings growth.

Income and growth

Meanwhile, self storage company Safestore Holdings (LSE: SAFE) is a stock to watch out for investors seeking growing dividends.

The stock has a 2.8% dividend yield and a strong track record of increasing its payout year-on-year. Annual dividends for the stock have grown by an average rate of nearly 20% over the past four years, with the company paying a total of 11.65p last year.

Looking forward, further dividend growth at a double-digit pace seems likely, since the company’s EPRA earnings — that is its earnings before property revaluation gains — cover dividend payments by almost 1.7 times.

Room for further improvement

With an occupancy rate of just 68.6%, the company also has plenty of room to boost earnings. Safestore has almost 1.8m square feet of unlet space at the end of its 2016/7 first quarter, which means there’s huge potential should its occupancy rate catch up with rival Big Yellow Group’s occupancy rate of over 75%.

And although a slowdown in UK economic growth poses big risks to continuing momentum for the business, underlying fundamentals remain broadly positive with average storage rates continuing to climb on a like-for-like basis.

Shares in Safestore have gained 20% year-to-date, but further upside seems possible given expectations of earnings and dividend growth in the medium term. City analysts forecast its underlying earnings to grow by around 10% over the next two years, with dividend growth in the low-to-mid double-digits. This means that although its shares currently yield 2.8%, they have the potential to rise to almost 3.5% by 2018.

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More reading

Jack Tang 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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