Picture supply: Getty Pictures
Lots of penny shares are in obscure corporations most individuals have by no means heard of. However not all. Take ME Group (LSE: MEGP) for instance. 4 years in the past, the corporate was buying and selling firmly in penny share territory. Since then, it has greater than quadrupled, due to stable income and money flows.
Whilst you might by no means have heard of the corporate, there’s a truthful likelihood you will have seen (and even used) considered one of its 1000’s of picture machines in supermarkets, buying centres, and elsewhere, or considered one of its RevolutIon laundry machines.
Enticing enterprise mannequin
This can be a profitable enterprise. The corporate operates in areas which have excessive demand. Even in the course of the depths of the pandemic, when ME Group was buying and selling as a penny share, revenues fell however didn’t collapse.
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In terms of profitability, earnings have moved round.
Even earlier than the pandemic earnings per share had declined – they usually took a pummelling over the subsequent a number of years, serving to clarify why ME was buying and selling as a penny share.
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However because the chart above exhibits, they’re now stronger than they’ve ever been. I feel that speaks to the attraction of ME’s enterprise mannequin: its automated machine community signifies that its labour prices might be stored low, whereas the companies it affords are likely to have strong demand. If individuals have to do their laundry, they should do their laundry.
Valuation may supply long-term worth
However a very good enterprise doesn’t essentially make a very good funding. Valuation issues too.
I feel ME Group stacks up pretty effectively on that entrance. Trying on the present price-to-earnings ratio of 13, I feel it affords the potential for long-term appreciation if earnings per share proceed to extend in future.
On prime of that, the dividend yield of 4.3% appears to be like engaging to me.
I feel the corporate’s distinctive property of machines and lengthy expertise of merchandising machines helps set it aside from opponents. However there are dangers. As we noticed in the course of the pandemic, any drop within the variety of individuals visiting buying centres can result in a pointy drop in demand.
Purchase or wait?
Having been a penny share inside the final 4 years, although, may ME Group head again there any time quickly?
Something is feasible within the markets, in fact, however for now not less than I feel the agency’s strong enterprise efficiency is prone to preserve the share worth buoyant. Its lack of competitors in lots of areas offers it pricing energy, which I feel may imply we see even increased earnings in future.
So, despite the fact that it not affords the screaming worth it did as a penny share, if I had spare money to take a position at the moment I’d be comfortable so as to add ME Group to my portfolio.