Despite all the uncertainty created by Brexit the latest reading from the Quoted Companies Alliance/YouGov Small & Mid-Cap Sentiment index suggests most small and medium-sized companies in the UK are optimistic about 2019.

Nearly three quarters of the companies surveyed expect to increase the number of employees in the coming 12 months and 47% are looking to raise capital over the same time period – the highest since March 2016.

Picking up on this theme, Shares has used a market screening tool to identify 10 small cap companies which are forecast by analysts to deliver strong earnings growth in 2019. In this article we discuss some of these stories in more detail and what lies behind the growth which is forecast for the year ahead.

MEDIA, MUSIC AND EVENTS

Boku (BOKU:AIM) has enjoyed stellar growth in recent years by enabling consumers to pay for goods and services like a Netflix or Spotify subscription by adding the cost to their monthly mobile phone bill.

The stock recently took a hit after several big shareholders sold down and Boku bought Danal to add mobile identity verification services. The decision to pay in shares caused big dilution for investors and expectations for investment in sales, marketing and engineering have resulted in hefty earnings downgrades from broker Peel Hunt, although strategically Boku is still heading in its preferred direction.

Danal gives Boku a fully formed identity business and a new set of customers, plus expands the type of merchants it can serve.

Even after the recent earnings downgrades, Boku is still expected to deliver 75% adjusted pre-tax profit growth in 2019 to $2.8m, soaring by a further 457% to $15.6m in 2020.

Small cap Arena Events (ARE:AIM) provides equipment to run major sports events and shows. It joined the stock market in July 2017 with the intention of buying rivals to expand its skillset and geographical coverage. This strategy is now in play with various deals done in the US, Hong Kong and Dubai.

Recent multi-year contract wins and extensions include tiered seats for the PGA of America’s golf events in the US, Wimbledon in
the UK and a major oil and gas conference in the Middle East.

Stockbroker Cenkos forecasts that Arena Events’ pre-tax profit will rise from £7m in 2018 to £10.7m in 2019. The dividend is also expected to grow rapidly, rising from an expected 2p per share for 2018 to 2.5p next year. The latter puts the stock on a 4% prospective yield.

York-headquartered Gear4music (G4M:AIM) is the largest UK-based online retailer of musical instruments and music equipment.

Own-label and branded product sales including Fender, Yamaha and Roland are on upward trajectories.

Emerging from a heavy investment phase, its multilingual, multicurrency websites now deliver to over 190 countries. Gear4music is expected to grow rapidly in 2019 thanks to warehouse expansion, a growing active customer base and as new products are added to the website.

For the year to February 2019, Panmure Gordon forecasts a surge
in sales to £110m (2018: £80.1m), ahead of £129.5m and £140.1m in the years to February 2020 and 2021 respectively. The consensus forecast implies earnings per share (EPS) growth of 58% in the year to February 2020.

FINANCIAL FOCUS

Guernsey-headquartered Duke Royalty (DUKE:AIM) lends money to private companies on a long-term basis, typically between 25 and 40 years, in exchange for part of their revenue (a ‘royalty’). The borrowers tend to use the funds for acquisitions or other investments to grow their sales, which, if successful, should boost profit for Duke.

Lending is secured on the borrowers’ assets and Duke’s costs are minimal so almost all of the increase in profit is retained. For the year to March 2019 Duke is expected to a move from losses of £1.8m to net profit of £2.6m, rising to profit of £7.6m in March 2020.

PCF Group (PCF:AIM) is a challenger bank lending to consumers and small businesses. It started lending money to people buying used cars but last year it obtained a full banking licence and business lending now makes up half of its loan book.

Being a bank gives it access to cheap funding which means it has been able to expand more aggressively than in the past. Meanwhile its focus on ‘prime’ lending means that non-payments are low, and costs are also low. Increased lending and the newly-acquired media-funding business are expected to lift net profit by 57% to £6.6m for the year to September 2019.

FRESH AND EASY

Budget hotel operator EasyHotel (EZH:AIM) has enjoyed rapid earnings growth thanks to its focus on opening new hotels with a futher 2,974 rooms in its development pipeline.

 EasyHotel offers ‘no-frills’ accommodation near city centres both in the UK and abroad, including Spain, Belgium and Portugal.

Earnings in 2019 are expected to be driven higher by new hotel openings in Europe and Dubai, as well as the maturation of hotels in the UK and Barcelona.

Broker Investec forecasts earnings to achieve a compound annual growth rate of 82% between 2018 and 30 September 2021.

Investors may be familiar with some of Venture Life’s (VLG:AIM) brands, including oral healthcare range UltraDEX and mouthwash product Dentyl.

It develops, manufactures and commercialises self-care products for other companies. For example, its contract with healthcare products group Alliance Pharma (APH:AIM) runs until 2025 and accounts for 24% of sales. 

In July 2018, Venture Life acquired Dentyl and breath-freshening capsules BB Mints for £4.2m. The acquisition of Dentyl is expected to be earnings enhancing in the first financial year.

Broker Cenkos forecasts 228% pre-tax profit growth to £2.3m in 2019.

TECHNOLOGY-BACKED GROWTH

Taking audio conferencing into the 21st Century, LoopUp (LOOP:AIM) is doing something about historic under-investment in this market.

With a best-in-class platform, the company prides itself on smoothness of service thanks to its intuitive and easy to use system rather than being the cheapest around. That could be beneficial to profit margins even in the face of competitors.

The company has a strong return on investment track record (it earns 75p annually for every £1 invested in sales and distribution) and has almost exclusive recurring revenues.

It has reported a healthy pipeline of new work, while expansion beyond the UK and US into Australia gives LoopUp another growth lever to pull next year when earnings per share are forecast to surge more than 100%.

A basic understanding of recent accounting rule changes (IFRS 15) will help put Eckoh’s (ECK:AIM) recent pedestrian growth into perspective. This new model requires only completed work on multi-year contracts to be put through the books, with income due in the future sat on the balance sheet as deferred revenue.

For Eckoh, which provides automated secured payments software, deferred revenue jumped 48% in the first half of this year.

While long-term markets in the UK and Europe still offer growth potential, the US has the best scope for progress in 2019, where businesses are surprisingly behind the curve in customer payments automation. It is this catalyst which underpins a forecast for earnings per share to advance 55% in the financial year to March 2020.

GHOST IN THE MACHINE

AIM-quoted Kape Technologies (KAPE:AIM), formerly called Crossrider, has used investor funding to bolt together a selection of internet and digital security businesses hinged on its CyberGhost virtual private network product.

The acquisitions of Intego and ZenMate – both in the second half of 2018 – offer growth potential through cross-selling to the enlarged customer base.

Integration of the pair has gone well, albeit with a short-term strain on profit in 2018, but that could be reversed in 2019 where earnings before interest, tax, depreciation and amortisation (EBITDA) is forecast to jump 40%-odd to more than £14m.

Why you need to be careful with resources firm’s earnings forecasts

Plenty of smaller oil, gas and mining operators are forecast to see significant earnings growth in 2019 but volatility in the commodities market means these numbers should be treated cautiously.

Forecasts may not have been updated since, for example, oil sank from multi-year highs above $85 per barrel in early October to a little over $60 per barrel.

Firms are likely to have limited scope to reduce costs at the same rate and this will put downward pressure on earnings.

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