Shares in Castleton Technology (LSE: CTP) have produced a very impressive performance for investors this year. Year to date the shares have surged nearly 80%, after adjusting for a 160-to-1 share consolidation back in October.
Whats more,since the beginning of 2014 Castletons shares have gained more than 400% as the company has gone from strength to strength.
2016 is set to be yet another positive year for Castletons shareholders. Indeed, 2015 has been somewhat of a consolidation year for the group as management hascompleted four new bolt-on acquisitions to boost growth. Purchases includeKeylogic Limited, Opus Information Technology Limited, Impact Applications Limited and Brixx Solutions Limited.
Thanks to these acquisitions, in the space of just a few months, Castleton became the leading supplier of software and services to the social housing sector. Nearly a third of all the social housing associations in the UK are now Castleton customers and by looking at the companys interim results release for thesix months ended 30 September 2015, its clear how far the company has come over the past 12months.
For the six months, Castleton reported sales of 8.5m, up 350% year-on-year and 16% on an organic basis. Adjusted earnings before interest, tax, amortisation and depreciation rose to 1.7m for the period, up from a loss of 0.1m as reported for the same period last year.
Unfortunately, admin expenses ate up the majority ofEBITDA and profit for the group remained elusive. However, Castleton did report a positive cash flow figure for the period, a more telling gauge of business growth. During the six months, Castleton generated 0.8m in cash from operations,
Fifty five percent of the companys revenue is recurring, which gives Castleton a predictable, stable income stream to support further growth.
Based on Castletons impressive trading for the six months to the end of September, City analysts expect the company to report a pre-tax profit of 3.2m for the year to the end of March 2016. And based on the fact that Castleton has around 70m shares in issue (post consolidation) and after deducting 20% corporation tax from the pre-tax estimate, according to my figures the company is set to report earnings per share of 3.7p for the year. That meansCastleton is trading at a forward P/E of 20.
City analysts are currentlyexpecting the companys earnings to expand by a further 18% during 2017, so this valuation seems appropriate considering Castletons aggressive growth.
Balance sheet observations
High-growth small-caps like Castleton usually have weak balance sheets, which makes them unsuitable investments for all but the most risk-tolerant investors. Castleton doesnt have the same problem. The company is generating cash and has been using stock as currency rather than debt to pay for acquisitions, helping keep the balance sheet clean. Net debt-to-equity was around 50% at the end of September.
The bottom line
So overall, Castleton is growing rapidly, has a strong balance sheet and the companys shareslook to be good value. Itcould be a top pick for 2016.
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