Backed by Neil Woodford, it is trying to take on BT by building its own fibre optic infrastructure in UK towns and cities. The company is facing a massive uphill struggle to get to where it wants to be, but it is making steady progress. Last year it signed a groundbreaking strategic partnership with global telecommunications firm Vodafone to roll out Fibre-to-the-Premises to at least 1m homes in 12 existing CityFibre towns and cities. As well as this deal, last year management inked two contracts with public bodies to expand and develop network infrastructure.

Pushing ahead 

According to a trading update issued by the firm today, progress is already well under way in the partnership with Vodafone. Detailed planning and preparation work is in progress for all the 12 cities in the pilot programme with work in the first location, Milton Keynes, expected to start in the first quarter of this year.

Unfortunately, while the company is making progress, it will be some time before shareholders see any results. City analysts are expecting the group to remain lossmaking for the next few years as it invests in its network. Still, for long-term investors, the opportunity here could be enormous. For any telecoms business, building out the network is the hardest part, after this, capital spending should fall dramatically and recurring income from customers’ subscriptions provides a healthy cash flow to reinvest back in the business or return to shareholders. 

It might take several years before CityFibre is in the position where it can consider cash returns, but the longer it waits, the more dominant it will become in the market, which should ultimately lead to higher returns for investors. Put simply, barring any unforeseen setbacks, its growth appears to be only just getting started.

Market leader 

Another company I’m positive on the outlook for, and believe could achieve steady returns for investors over the long term, is GYG plc (LSE: GYG).

Another favourite of Neil Woodford, this company provides services to superyacht owners around the world. The great thing about this business is its defensive nature. People who spend tens of millions of pounds buying their yachts are not going to cut corners on repairs and maintenance. They will turn to the provider with the best reputation, no matter what the cost. And GYG has an excellent reputation among clients. The firm recently signed a letter of intent to work on ‘REV 182’, the world’s largest research and expedition vessel currently under construction.

As it builds on its reputation, City analysts are expecting the company’s earnings per share to leap by 55% during 2018, leaving the stock trading at a forward P/E of 10.4. Moreover, analysts believe the shares will support a dividend yield of 4.8% for 2018. In fact, GYG’s dividend potential is what attracted Woodford to it in the first place. Commenting on his decision to take a 17.2% stake in the business at the time of its IPO, Woodford said: “It is a cash generative business, which is expected to pay an attractive dividend and support a progressive dividend policy going forward.”

I don’t share Woodford’s enthusiasm for all his holdings — for example, I’ve recently turned bearish on Lloyds (one of his top picks) — but there are plenty of stocks where I do see great value for investors buying today.

Generous dividend policy

An under-the-radar AIM-listed firm, which joined the market as recently as July, may not appear a particularly obvious choice. However, Woodford participated in the IPO at 100p a share, taking a 17.15% stake in the business, and he noted: “The company is the leading provider of painting and refit services to the superyacht industry. It is a cash generative business, which is expected to pay an attractive dividend and support a progressive dividend policy going forward.”

The company in question is GYG (LSE: GYG) — Global Yachting Group — and when I first took a look at it, I liked the cut of its jib. In particular, the board intends to pay a dividend for 2017 equating to a yield of 3.2% (calculated on the 100p IPO price and its six months as a listed company and thus based on an annualised yield of 6.4%). The generous dividend policy caught the market’s eye and the shares soon climbed to 145p.

Through choppy waters

A profit warning from the company in November didn’t dampen Woodford’s enthusiasm. Indeed, he bought more shares in the wake of it, taking his stake up to 18.2%. GYG said the reason for profit being below previous expectations was refit decision-making delays by owners, due to the two hurricanes that hit the US and Caribbean in Q3, and also a delay to one substantial scheduled contract, due to the vessel arriving in dock six weeks late. It said none of the group’s contracts had been cancelled, the work merely having been pushed over into 2018.

As I’m writing, analyst forecasts for 2018 show a dividend covered twice by earnings and a yield of 4.6%. The stock looks very buyable to me on this basis because, like Woodford, I believe GYG has good prospects of delivering strong earnings and dividend growth in the coming years.

Energised dividend

Drax (LSE: DRX), the FTSE 250 energy firm, will be better known to most investors than GYG. Woodford began building a stake in the company for his Income Focus Fund in July. This was on the basis that he believed the share price didn’t adequately reflect “recent strategic developments … [which] have diversified and improved the quality of Drax’s earnings streams and have allowed the company to introduce a progressive dividend policy”.

I agree with Woodford, particularly as the share price has drifted a good deal lower since July. Drax’s new dividend policy has been set at a level it says “is sustainable and expected to grow.” It intends to pay out a gross £50m for 2017, which equates to a yield of 4.6%, and analysts expect this to rise to over 5% for 2018. Again, the prospect of a high starting yield and strong growth lead me to rate the stock a ‘buy’.

Market leader 

Having participated in the IPO, market minnow Global Yachting Group (LSE: GYG) — which specialises in providing painting and refit services to the super-yacht industry — now makes up 1.4% of Woodford’s relatively new Income Focus Fund. Since the end of August, the share price has climbed a very solid 22%, suggesting this was another inspired move by the closely-followed fund manager. Based on recent interim results, this kind of positive momentum looks set to continue.

In the six months to the end of June, GYG increased group revenue by 19.4% to just under £34m. Adjusted earnings before interest, tax, depreciation and amortisation soared by almost 275 to £3.3m, even if exceptional items (most of which related to the aforementioned IPO) did lead to the company reporting an operating loss of £1m. As of 30 June, the company had £4.7m net cash on its books.

Boasting a record order book of £56.7m by the end of August, it doesn’t look like GYG will be short of work any time soon. Indeed, the company has already identified a £385m pipeline of projects it is looking to secure, £90m of which relates to the ACA Marine coating division — a recent acquisition. 

Trading on 17 times expected earnings, GYG also boasts a low price-to-earnings growth (PEG) ratio of 0.7 for the current year, indicating good value. In addition to this, the cash generative nature of its business should be of interest to income hunters with the shares expected to yield 1.9% in the current year before rising to a very tempting 4% in 2018/19.

Growth and income at a reasonable price? Sounds pretty good to me.

Hot stock

Another intriguing recent pick from Woodford has been AIM-listed Strix (LSE: KETL) — a market-leading manufacturer of kettle safety control products.  

Like GYG, this is a company that seems to be performing well, even if recent interim results relate to a period before it became available to investors to own. Revenue for the six months to the end of June increased by 6.7% to £42.2m with pre-tax profit rising 9.6% to £10.3m.

According to CEO Mark Bartlett, the Isle of Man-based business is making “solid progress” on its initiatives which include the launch of its new U9 range of controls. Strix’s export sales have also been “particularly strong“, up around 10% on the previous year. Positively, the company appears to be increasing its market share even further by securing deals with major European retailers at a time when a number of products from competitors are being withdrawn.

Although still very early days, the positive start to Strix’s time on the stock market bodes well. Like GYG, its shares still look great value, trading as they do at just 12 times earnings. The company boasts a net cash position, high operating margins, a huge number of patents and growth potential in emerging markets. So long as you — like Woodford — can ignore the incredibly dull but undeniably important nature of what it does, Strix could be a decent addition to your portfolio.

GYG an income portfolion addition?

In July, Woodford added £63m market cap GYG plc (LSE: GYG) to his Income Focus portfolio. A £63m market cap small-cap stock for an income portfolio? You heard right.

GYG is a provider of painting and maintenance services to the superyacht industry. Woodford stated in his July portfolio update: “It is a cash generative business, which is expected to pay an attractive dividend and support a progressive dividend policy going forward.”

The superyacht specialist today released its first set of interim results, since coming to the market in early July. How do the numbers look? In my view, they paint a mixed picture. While group revenue increased 19.4% to €33.9m, the company generated an operating loss of €1m, due to €3.2m of exceptional items mainly related to the IPO. The group’s net cash balance fell to €4.7m, from €6.2m six months earlier. Chief executive Remy Milliott commented: “The Board remains confident about the future as we enter our busy post-summer season.”

There’s several things I like about this business. The company currently has a 17% market share of the superyacht refit market and services 25 out of the 50 largest superyachts. According to GYG, superyachts require a major survey service every five years to comply with class, maritime and insurance requirements. Yacht owners typically undertake annual maintenance as well to keep their vessels in optimum condition. As a result, recurring revenues should be strong. City analysts expect GYG to reward shareholders with dividends of 2.8p and 5.8p this year and next, yields of 2.1% and 4.3%, respectively.

Having said that, while GYG looks to have potential for both capital growth and dividends going forward, personally I’d wait for the company to be profitable before investing.

Equitini growth to come?

One Woodford small-cap I would buy today is investor services specialist Equiniti (LSE: EQN). I last covered the stock almost a year ago, when it was trading near the 200p mark, however, since then the shares have risen over 40% to now trade just below 290p. Despite the gain, I believe there could be more share price growth to come.

The company appears to have strong momentum at present, recently winning new clients such as Aon Hewitt and House of Fraser, and boasting an impressive 100% client retention with new client wins across all divisions.

Furthermore, the group recently announced a deal to acquire the share registration business of US bank Wells Fargo for £176m. Equiniti believes the acquisition has “compelling strategic rationale” and should be “strongly earnings accretive in the first full year of ownership.” If the deal is approved by shareholders at the company’s general meeting scheduled for later this week, Equiniti will become the third largest share registrar in the US and a key multinational player.

Trading on forward looking P/E ratio of 18.1, Equiniti isn’t the cheapest small-cap around, however, given the company’s growth potential, I believe the valuation looks reasonable.

For example, he’s bought more shares in his top holding AstraZeneca and continued to build his stake in Lloyds for his Income Focus fund. The Black Horse is now his third-largest holding with a weighting of 3.9%.

However, I’m particularly interested in two other Woodford stocks that I happen to agree look great buys right now. One is a familiar blue-chip giant, whose shares he believes “have not looked as attractive as they are currently, for several years.” The other is a dividend stock you’ve probably never heard of that he’s just bought a 17% stake in.

Seriously undervalued

Woodford has held tobacco companies for decades but believes the “valuation opportunity” he identified all those years ago has now “largely played out.” With one exception. He continues to see Imperial Brands (LSE: IMB) — his last remaining holding in the sector — as seriously undervalued.

The company’s shares are currently trading at around 3,200p, which is a 22% discount to their all-time high of 4,130p achieved this time last year. As Woodford has pointed out, Imperial remains a highly cash generative business with a strong dividend-growth record. The decline in the shares has put it on an undemanding price-to-earnings (P/E) ratio of 11.8 with a smokin’ dividend yield of 5.4%.

Investor sentiment towards the industry hasn’t been helped by regulatory changes to address issues of addiction proposed last month by the US Food and Drug Administration. However, Woodford and his team argue that this could ultimately be beneficial to Imperial: “We see this as the beginning of a process to deregulate next-generation products.”

New buy

I spent yesterday evening reading the AIM admission document of Global Yachting Group — now GYG (LSE: GYG) — which listed on 5 July with a placing at 100p a share. I have to say, I like the cut of its jib.

This week’s update from Woodford’s Income Focus fund revealed: “We added a new stock to the portfolio when we participated in the initial public offering of GYG. It is a cash generative business, which is expected to pay an attractive dividend and support a progressive dividend policy going forward.”

Super-rich potential

GYG is a leading super-yacht painting, supply and maintenance company with a 17% share of the global market. Its experienced management team is looking to grow the business organically and has also identified a number of potential targets for strategic acquisitions that would complement the group’s existing offering.

The board intends to pay a current-year dividend yielding 3.2% on the IPO price. This is pro rata from the listing date based on an annualised yield of 6.4%. The shares are now trading at 117.5p (market cap £55m), so we’re looking at a yield of 2.7%, rising to 5.4%+ next year. The handsome dividend is supported by forecast earnings of 9p a share, rising to 11.2p, which gives an attractive P/E progression of 13.1 down to 10.5.

Finally, the balance sheet is decent, with the IPO having reduced net gearing of 93% at the last year-end to 38% on a pro forma basis.