Shares of Eckoh (LSE: ECK) are little changed since it announced its annual results earlier this week. After a breakthrough year in the US, I believe this provider of secure payment products and customer contact solutions has a promising future. It looks undervalued to me at a current share price of 47.5p and market cap of £119m.
Tremendous growth opportunity
Eckoh reported an impressive 30% increase in revenue to £29.1m from £22.5m for its financial year ended 31 March. This was its fourth successive year of double-digit top-line growth. Revenue from the UK increased by a reasonable 5% but in the US it soared by 145% and now represents a third of the group’s total revenues.
The US growth was all the more impressive because Eckoh transitioned from ‘capex pricing’ to ‘opex pricing’ during the year. Under the former model, the company receives a large initial payment and then small annual payments, while under the latter, revenue is recognised across the term of the contract. As a result, only $1.8m or 21% of the $8.3m contract value won in the year has been recognised, with the remaining $6.5m to come through largely over the next three years.
The US provides Eckoh with a tremendous growth opportunity. The average contract size has climbed from $53,000 to approaching £1m over the last couple of years. As the company builds scale, the combination of strong revenue increases and expanding profit margins are set to turbo-charge earnings growth.
The company trades on a current-year forecast price-to-earnings (P/E) ratio of 29, falling to 24 next year. With annual earnings growth expected to run at a mid-20s percentage for the foreseeable future, the shares look good value and very buyable to my eye.
Wealth manager AFH Financial (LSE: AFHP) is another under-the-radar small cap where recent results persuade me that the company has a bright future. And in my view, a share price of 265p (market cap £80m) undervalues the growth prospects of this business.
For all the growing popularity of low-cost DIY investing, AFH demonstrates that there’s continuing strong demand for advisors who provide financial planning and wealth management services. AFH’s client base is mass affluent and high net worth individuals, as well as a number of companies. And it’s growing both organically and by acquisitions.
Recent results for the half-year ended 30 April saw revenue increase 19%, with funds under management rising 17% to £2.2bn from £1.88bn at April 2016. The balance sheet is cash-rich, bolstered by a £10m placing in March, and the company says it see a strong pipeline of acquisition opportunities.
As with Eckoh, increasing scale is set to push down costs. So, again, we have the prospect of twin drivers of strong top-line growth and rising profit margins to power earnings higher at a rate of knots.
For the company’s financial year ending 30 November, earnings growth of 90% is forecast, followed by over 50% next year, leading to P/Es of 19.5 and 12.5, respectively. These multiples look hugely attractive given the anticipated levels of earnings growth and suggest to me that now could be a great time to buy a slice of this business.
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G A Chester 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.