I’m an ex-IT guy so when analysing small-cap UK shares, I tend to look at tech stocks. This is an industry I have a lot of experience in, making it easier for me to gauge if these companies are doing the right thing and are worth considering.
Two that have popped up on my radar lately appear to be trading far below their fair value. That’s always a good place to start but it’s no good if they don’t have strong growth potential.
So I decided to dig deeper.
An up-and-coming IT firm
Redcentric (LSE: RCN) is a managed services provider, offering the usual IT mix of remote access, networking and cloud support. With a £187.5m market cap and 659 employees, it’s an up-and-coming company listed on the AIM marketplace.
It’s been unprofitable for the past two years and the shares have fallen 22% since late May. But future cash flow estimates remain high and the current price is estimated to be undervalued by 48% using a discounted cash flow model. That suggests there could be decent growth potential — if the forecast earnings growth of 63.8% materialises.
Could that happen?
Well, in its full-year 2024 results released in August, revenue was up 15%. It still posted a net loss of £3.4m but earnings per share (EPS) improved from a 5.9p loss to a 2.2p loss. Overall, performance has been improving over the past few years.
However, it’s treading a fine line with debt. At £43.5m, it looks like its operating income only covers debt interest by 0.6 times. That puts it at risk of defaulting if earnings come in lower than expected.
For now, it’s sufficiently covered by equity but it will need to drop a bit before I consider the stock a buy for my portfolio.
A confident electronics firm
TT Electronics (LSE: TTG) hit the news last week when it rejected three takeover bids — two from fellow electronics firm Volex and a third from an anonymous source. The shares skyrocketed 54% on the news, which looks great until we zoom out.
The price is actually down 30% this year because the company reported potential profitability issues in September.
Following news of the rejected bids, Deutsche Bank put in a Buy rating on the stock.
TT Electronics manufactures electrical components for critical industries like healthcare, aerospace and defence. It operates across Europe, providing solutions for wireless connectivity, motion sensors and power management. It’s a relatively small company, with a £198m market cap and fewer than 5,000 employees. Revenue in 2023 came in at £613.9m.
In September, it delivered a trading update revealing operational issues in North America. As a result, it reduced its expected revenue and earnings for the second half of 2024. The price fell 37% following the news, prompting the takeover bids I mentioned above.
That’s where the risk comes in. If the issues in North America aren’t resolved, earnings could take a further hit. It’s already a small company operating in a fairly competitive industry. As a much larger firm, the jilted Volex could try to elbow in on its market.
However, the rejections of the takeover bids reinforce the company’s faith in its true value. With confidence that strong, it may well recover, making the current low valuation an opportunity worth considering.
The post I found two small-cap UK tech shares with bargain-basement valuations appeared first on The Motley Fool UK.
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Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has recommended Tt Electronics Plc. 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.
