Picture supply: Domino’s Pizza Group plc
Investing in penny shares may be notoriously dangerous. These small enterprises usually have unproven enterprise fashions and flimsy fundamentals. And regardless of being priced at 2p, say, there’s nothing to cease a penny inventory falling one other 50% to 1p (or beneath!).
That mentioned, if buyers can discover the fitting small-cap share, the features may be very profitable. We’ve seen that not too long ago with Filtronic, a former penny inventory that has rocketed 627% because the begin of 2024 as a result of a game-changing partnership with SpaceX.
DP Poland at a look
One penny inventory I feel has plenty of potential is DP Poland (LSE: DPP). The AIM-listed firm operates the Domino’s Pizza franchise throughout Poland and Croatia.
On the finish of March, the group had 120 shops below the Domino’s model (115 in Poland and 5 in Croatia), and 90 shops below Pizzeria 105, following a latest acquisition.
In 2024, income jumped 20.2% 12 months on 12 months to £53.6m, with sturdy like-for-like (LFL) gross sales progress of 17.9% in native currencies. This was the agency’s third consecutive 12 months of double-digit LFL gross sales progress.
Administration says efficiency was “pushed by a major rise so as volumes and profitable buyer acquisition initiatives.” It’s additionally received a well-oiled supply operation, as one would anticipate from Domino’s, which is more and more standard in Poland.
Impressively, final 12 months’s common weekly order depend reached 827, a 13.2% enhance. And buying and selling within the first few months of this 12 months is off to an excellent begin.
Transferring in direction of profitability
There are a handful of issues I like right here. The strategic acquisition of Pizzeria 105, the fourth-largest pizza model in Poland, accelerates the agency’s push in direction of working 200 Domino’s shops by the tip of 2027.
We’re positioned to turn into the main participant within the Polish pizza sector within the coming years.
David Wild, DP Poland Non-Govt Chair
This acquisition, which price £8.5m, additionally fast-tracks the group’s transition in direction of a predominantly franchised, capital-light mannequin. Pizzeria 105 already operates a 100% franchised community of 90 shops, and this deal provides Domino’s a further presence in 31 new Polish cities.
The corporate ended the 12 months with a debt-free steadiness sheet and £11.3m in money. And losses narrowed considerably, falling to £0.5m from £5m the 12 months earlier than. Adjusted EBITDA jumped 37.6% to £4.8m.
Dangers to keep in mind
Encouragingly then, DP Poland seems to be shifting in direction of profitability. However a key danger right here is that the agency has fairly an extended observe file of losses, and this shouldn’t be ignored.
There’s additionally numerous competitors in Poland, with extra eating places and takeaways providing house supply choices.
In the meantime, any spike in inflation may enhance the price of uncooked elements, in addition to put strain on shopper spending. On this situation, the march in direction of profitability may endure a setback.
Value a glance
The inventory is down 21% since March and now trades at slightly below 10p. This offers DP Poland a £90m market cap and affordable price-to-sales ratio of 1.7.
As a result of dangers concerned, I solely have a small place within the inventory. However I feel it has strong progress potential and is price contemplating.
Over the following few years, disposable incomes are anticipated to rise in Croatia and Poland (two of Europe’s fastest-growing economies). Consequently, administration thinks there’s potential for 500+ places over the long term.
