25 Jan A small-cap growth stock I’d buy alongside Premier Oil plc in 2018
In Ergomed (LSE: ERGO), I see something unusual for a very-small-cap pharmaceutical company. Many in the sector at this size are basing their whole future on the success of some new drug development or other, and that carries plenty of risk.
Ergomed does engage in such research and has an enticing-looking pipeline — but on top of that, it also provides specialised services across the pharmaceutical industry. That turns it into the kind of picks-and-shovels company that I like — whoever makes the big discoveries, Ergomed’s services division should benefit.
Full-year results should be with us at the end of March, and Thursday’s trading update suggests they’ll be very good indeed.
Seriously impressive growth
Total revenue for the year is expected at around £47m, up 21% from 2016’s £39.2m. And crucially, that all-important services revenue should leap by 35% to £39m, from £29.2m. The growth is actually accelerating too, with new service contracts worth £54m won during the year — and that’s 29% up on the previous year.
Add to that an £88m order backlog of contracted future work at the end of the year (up from £70m), and I reckon we’re looking at a company with a glowing future.
And the big beauty is, we don’t have to pay an inflated growth price for the shares. Admittedly we’re looking at a P/E based on 2017 expectations of 31, but very strong EPS growth forecasts would bring that crashing down. The 75% rise predicted for 2018 would drop it to 17.5, with 2019’s 54% hammering it as low as 11.5.
Growth forecasts like that provide super-low PEG ratios of 0.2 for each of the next two years – surely an attractive growth opportunity.
I took a calculated risk buying shares in Premier Oil (LSE: PMO) in late 2015, banking on an oil price recovery taking the pressure off the firm’s heavy debt burden — and then they slumped further. It’s taken a while, but I’m just about back to break-even, and I see the future for the company as looking more attractive.
Just before Christmas, Premier announced the completion of the sale of its Wytch Farm field to Perenco UK, which raised a welcome $200m to go towards paying down debt.
Then, in late December, we heard news of first oil from the firm’s Catcher field, with the project coming in almost 30% under budget. With an initial expected production rate of around 10,000 barrels per day, chief executive Tony Durrant described the event as “a significant milestone for Premier.“
First cargo sold
And Wednesday’s Catcher update announced the lifting of its first export cargo of approximately 500,000 barrels ahead of schedule — and it’s been sold. There’s another cargo due in late February, and that has also been sold.
Performance so far is said to have been “excellent with high operational uptime,” and gas commissioning is going well.
The other boon is the recovering oil price, with Brent Crude having now broken through the $70 level — it was as low as $55 as recently as November. I’d set a finger-in-the-air estimate of around $75 for the price at which I’d start feeling safer about my Premier investment, and we’re getting close.
But there’s still a lot of risk attached to it, and you might (or might not) be surprised to learn that it’s one of the most shorted stocks in the UK. Bear that in mind if you buy.
Balancing the risk
It’s understandable if you’re wary of a high-risk stock like Premier Oil, and one possible approach is to offset it with a safer growth stock at a more sustainable price level.
The company selected in our Top Growth Share From The Motley Fool report has already provided handsome rewards, our analysts think it has a lot more to give, and it looks a safe pick to me.
The report is free, so just click here now for your personal copy.
- A multi-bagging growth stock I’d sell today to buy Premier Oil plc
- Beware: Premier Oil plc is on the ‘most dangerous’ list
- Can you triple your money with Premier Oil plc in 2018?
Alan Oscroft owns shares in Premier Oil. 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.