Small caps still remain largely out of favour with the market but that doesn’t mean there aren’t some great opportunities out there.

True, fishing in this part of the market can be riskier than going for larger companies, and it’s really important investors understand this, but there is also the potential for them to outperform too thanks to the greater capacity for growth implied by their size.

In this, the first of a multi-part series the Shares team has put its collective heads together to identify six UK small caps which we believe have really exciting potential.

Because there’s less coverage and focus on small caps it is easier for names to fly under the radar and that certainly applies to some of our selections which offer a mix of growth, value and even income.

We’ll go on to run some data on the UK small cap market and look at some of the fund options both here and overseas in the remainder of this series.

But first, read on to discover of our sextet of great smaller companies and the reasons why they could make you money.

Aoti (AOTI:AIM) 120p – Market cap: £127.6 million

Martin Gamble – Education Editor

It is seemingly rare these days that a highly successful US-based medical technology group chooses to list its shares in London rather than the US. Investors should therefore rejoice that Aoti (AOTI:AIM) joined the AIM market in June 2024 at 132p per share, raising around £35 million.

Aoti has developed a proprietary oxygen therapy for use ‘at home’ which delivers oxygen to the body to heal chronic wounds caused by diabetic foot ulcers and venous leg ulcers.

Unusually for a newbie coming to the market, Aoti is already profitable and at the first-half results in September 2024, reiterated full-year guidance for revenue growth of more than 30% and a high teens EBITDA (earnings before interest, tax, depreciation, and amortisation) margin.

We believe Aoti has a credible and exciting profitable growth runway which is yet to be fully appreciated by the market.

Advanced Oxygen Therapy Inc’s (to give it its full name) proprietary oxygen therapy has demonstrated a proven immune response leading to revascularisation and sustainable healing of chronic and hard to heal wounds.

Clinical trials showed wounds are six times more likely to heal in 12-weeks and six times less likely to recur within 12-months. In real life settings covering more than 20,000 patients, the therapy has resulted in an 88% reduction in hospitalisations and 71% fewer diabetes-related amputations.

In late 2024 the company received FDA (Food and Drug Administration) clearance for the launch of a next generation NPWT (negative pressure wound therapy), NEXA, extending use to the home care setting.

Aoti’s strategy is to roll out its proprietary therapy on a state-by-state basis and, over time achieve full national coverage, as well as grow internationally.

In a trading update on 5 January, the company said it is now billing across six states, up from three at the time its listing, including Arizona, Massachusetts, New Jersey, New York, Tennessee, Virginia. The group is in advanced stages to add a further six states at the current juncture.

Cake Box (CBOX:AIM) 184p – Market cap: £73 million

James Crux – Funds and Investment Trusts Editor

Investors hungry for a slice of double-digit profit and dividend growth should tuck into franchise model business Cake Box (CBOX:AIM), the fresh cream celebration cakes retailer that has put a 2022 accounting controversy behind it with positive trading momentum set to continue.

The £73 million cap is the UK’s largest franchise retailer of fresh cream celebration cakes whose bull case rests on its growth prospects, strong cash generation and a net cash balance sheet. Steered by CEO Sukh Chamdal, the retailer’s cakes are completely egg free. Management believes this has no effect on the taste and texture of its products, but it allows Cake Box to service a much larger potential market, including customers who are unable to eat eggs for dietary or religious reasons, meaning the company is a growth play on demographic change.

Following a number of years of investment for growth, momentum is building at the sweet treat maker, which recently raised its new store opening target and whose marketing initiatives are boosting customer numbers and heightening brand awareness; a branded products collaboration with Nutella holds promise aplenty.

House broker Shore Capital believes the quality of both sites and franchisees is building, with most of Cake Box’s new sites being operated by existing franchisees already well-known to the group.

Results (12 November 2024) for the first half ended 30 September 2024 were encouraging, showing group revenue up 4.3% to £18.7 million amid positive momentum in franchise store sales, which grew 8.1% to £39 million. Franchisee online sales proved a highlight, growing 16.6% to £9 million, while gross margins expanded from 50.3% to 53.8% with a boost from continued production process efficiencies. In a show of confidence in Cake Box’s growth prospects, management bumped up the interim dividend by 17.2% to 3.4p.

For the year to March 2025, Panmure Liberum’s Wayne Brown forecasts pre-tax profit of £6.7 million and earnings per share of 12.2p, ahead of £7.8 million and 14.3p respectively in full-year 2026. Based on these estimates, Cake Box trades on a forgiving forward price-to-earnings ratio of 12.8 and offers a juicy 4.8% yield, based on Panmure Liberum’s 8.8p dividend estimate for the current year.

Cerillion (CER:AIM) £15.85 – Market cap: £471 million

Steven Frazer – News Editor

Built-in-Britain growth opportunities in the technology space may be rare, but they do exist, and Shares believes that Cerillion (CER:AIM) is one of them. If you’ve not come across the company before, in short, it scores very highly on core quality growth metrics like returns on capital, equity and operating margins, throws off oodles of cash and appears to have years of growth runway before it.

Cerillion, which floated in 2016 on the junior AIM market, built its reputation as an integrated enterprise billings and customer relationship management software platform sold to telecoms companies, particularly smaller and mid-sized operators but it has expanded the suite over the years to cover charging, interconnect, mediation, and provisioning solutions.

As the product suite has expanded, so has its customer base, and crucially that is starting to include top tier telcos too, with Three, Virgin Media and Cable & Wireless added to the list in recent years.

Crucially, Cerillion’s suite offers the industry the kind of flexible, off-the-shelf solutions needed to monetise vast capital investment in new 5G mobile (6G is coming) and fibre networks in a savagely competitive market environment.

Increasingly selling five-year software-as-a-service contracts, Cerillion’s investment in its IT suite and headcount (US in particular) means it has more tools in its stack to sell to clients, so average contract sizes have been rising, with November 2023’s Virgin deal worth €12.4 million over the full term of the contract, and an $11.1 million deal with a South African operator, announced in May 2024.

This helps explain a consistently growing new sales pipeline that hit a record £262 million in the first half of fiscal 2024 (to end of September), and sales conversion rates that indicate the level of replenishment activity is strong.

Since 2020, returns on capital and equity have grown to 35.7% (both in full year 2024) from 13% and 16.5% respectively, while operating margins have expanded from 13.5% to 42%.

The shares aren’t cheap, as you would expect for a business with these credentials, on a 12-month rolling PE (price to earnings) of about 28, based on Stockopedia data, but with EPS forecast to grow at 30% to 40% over the coming years, that multiple will fall steeply or, more likely, drive the share price ever higher. There’s also a chance it could be targeted by cash-rich private equity, with any deal likely to attract a large premium.

FW Thorpe (TFW:AIM) 303.5p – Market cap: £361 million

Steven Frazer – News Editor

The lighting products designer and manufacturer is one of those unsung small cap heroes that are judiciously sprinkled across the UK markets, handing loyal long-term investors market-beating returns. Over 10 years, the stock has chalked-up total returns (share price growth plus dividends) that average 10.6% a year, close on twice as good (6.3%) as the FTSE 100.

This is a business that dates back to 1936 when it was established by Frederick Thorpe and his son, Ernest, so it’s got oodles of track record. At the time it made vitreous enamelled steel reflectors, sometimes called porcelain enamel. This is an integrated layered composite of glass and metal used as shades that powerfully reflect and direct light, often used in industrial settings.

The company floated on the stock market in 1965 and it remains largely controlled by the Thorpe family, with stakes of about 50% of the shares. The Thorpe family remain crucial day-to-day movers and shakers, with Andrew Thorpe and Ian Thrope, both grandsons of the founder, on the board, while founder’s great grandson James Thorpe is a joint managing director. 

This is one of those buy-and-build stories, the company acquiring small specialists it knows well, which are integrated into the whole and allowed to operate with a large degree of autonomy, a bit like FTSE 100 Halma (HLMA). Today, that means 11 operating units, including LED manufacturing arm Thorlux Lighting, employing roughly 800 people.

Products are sold around the world and the business has a long track record for growing sales, profit and, crucially for the family and many private investors, dividends.

The firm made operating profit of £30.6 million in the year to 30 June 2024 on £176 million revenue, up from £19.6 million and £111 million in 2019. Average compounded growth runs at about 10% for both and the business throws off lots of cash, easily covering its 6.78p per share dividend last year. One-off payouts are also on the cards when cash surplus builds up, worth £56.3 million as of June 2024. 

No earnings forecasts are available but extrapolating average growth rates would imply EPS (earnings per share growing to around 28p over the next three years on last year’s 20.7p, implying a three-year PE (price to earnings) average multiple of about 12. We suspect that small cap investors will like the implied reliability at that price, we do.

Knights Group (KGH:AIM) 115p – Market cap: £100 million

Ian Conway – Deputy Editor

Casting our collective minds back to before the pandemic, 2018 saw a handful of small law firms rush to join the market.

They were marketed by advisors to their no doubt slightly bemused clientele as a way to ‘diversify’ their portfolios, which in a sense they were as in just about every case they lagged the market.

Among the better-quality companies to list was regional firm Knights Group (KGH:AIM), set up by David Beech in 2012, which was one of the first law firms to use an ‘owner-manager’ model as opposed to the centuries-old partnership model.

Beech reasoned that if lawyers owned a part of the business themselves, in the form of shares, they would have a greater incentive to collaborate and invest in its future, unlike traditional partners who compete among themselves to take out as big a slice as possible of the fees.

Thanks to a steady process of organic growth and more than two dozen savvy bolt-on acquisitions, Beech has increased Knights’ revenue base five-fold from £35 million in 2018 to a projected £165 million by the end of April this year.

By expanding into higher-margin legal services and taking on higher fee-earning lawyers, underlying pre-tax profit is on track to increase six-fold since IPO from £4.8 million in 2018 to a projected £28.7 million this year.

Knights now has the critical mass, the depth of expertise and the national coverage (outside of London) to attract top talent and achieve significant client wins, and the chief executive has set his sights on doubling revenue over the medium term while continuing to increase margins, meaning profit will grow faster still.

Remarkably, the shares are currently trading on less than five times current-year earnings and 0.9 times book value against 11.5 times earnings and 1.8 times book value for the FTSE All-Share.

Supreme (SUP:AIM) 176p – Market cap £205.64 million

Sabuhi Gard – Investment Writer

In November fast-moving consumer products maker Supreme (SUP:AIM) delivered an impressive set of first-half results.

The company hiked its sales and EBITDA (earnings before interest taxation depreciation and amortisation) guidance, the latter by around £2 million to £40 million, and also revealed a strong balance sheet. This is enabling the business to augment its organic progress with acquisitions.

The AIM-quoted company supplies products across six different categories including batteries, lighting, vaping, sports nutrition & wellness, branded distribution, and soft drinks, having bought UK soft drinks brand Clearly Drinks for £15 million in June – financed entirely from the company’s own cash reserves.

In early December, Supreme continued its spending spree with the purchase of famous British tea brand Typhoo for £10.2 million rescuing the company from administration.

Under Supreme’s ownership it is anticipated that Typhoo Tea ‘will operate a capital light outsourced manufacturing model’.

Shore Capital believes the Typhoo deal could pay off. ‘Supreme is not new to the buy and build arena, or to understanding the planning and discipline around turnaround. Whilst the proof will be in the pudding, or tea in this case, we harbour optimism that the Typhoo deal will enhance adjusted group EPS (earnings per share) in due course whilst the group sustains a strong balance sheet.,’

These purchases diversify Supreme’s business further and bring non-vape annualised sales to more than £120 million – around 50% of group revenue. This is important given the regulatory risks facing the vaping market.

To date Supreme can count a mix of supermarkets, wholesale, discount, and online retailers as its customers including Poundland, Tesco (TSCO), Sainsbury’s (SBRY), Waitrose
and Aldi.

The company is currently trading on 8.6 times forecast earnings which we think is highly attractive and there is the added benefit of a modest dividend yield of 2.1%.