Pennies from heaven, or pennies from hell? That is the question punters who delve into the penny stocks on the JSE are constantly mulling.
Penny stocks, by definition, trade below 10c. The premise is that small investors can grab literally millions of shares for a relatively small sum, put these in a bottom drawer and then hope for a ten bagger.
But value is relative, and shares can turn out to be expensive at even 1c if things go awry.
And they do — but somehow optimism usually abounds among penny stock pundits, though in truth most of these situations come to a sticky end.
In some cases — such as flea market business Global Village, security company Command Holdings and Kimberley Consolidated Mining — shareholders have been left without closure after the shares were suspended and then terminated.
At the outset it is important to note that when a share dribbles under 10c the company is usually in some form of operational trouble or under financial strain. There are very few, if any, exceptions.
Surveying the penny stocks on the JSE, there is ample evidence of inept management, weak operational assets, severe balance sheet pressure, factional battles and irrelevant or outmoded strategies.
Why would anyone delve into this uncomfortable place when the JSE still offers a multitude of companies with low risk and decent growth prospects?
Because, sometimes, the payoffs are legendary.
Readers might remember logistics group OneLogix trading at penny-stock levels in 2003 (and even holding a rights offer at 10c a share). Financial services business Finbond traded at 9c in 2012. Logistics specialist Santova traded as low as 10c in 2012 and electronic communications group Alaris (then Poynting) was at 5c in that same year. Punters mucking about in these shares at the right time have done much better than a ten bagger.
A more contemporary example would be building supplies company Brikor, which recently resumed trading on the JSE in penny-stock territory but has since risen above 50c.
Copper miner Orion Minerals, fourth industrial revolution services business 4Sight and day clinics business Advanced Health have all skipped out of penny-stock territory in recent months. They still have some stiff challenges to overcome, but in all three cases management has grasped the nettle and the first signs of a viable business model are emerging. The market has duly given credit.
Then again, consider the unfortunate optimists who backed turnaround plans at pubs business King Consolidated Holdings, cosmetics group Beige, food services counter Ububele, small bank Blue Financial Services, paint group Chemspec, steel merchant Alert, junior platinum miner Platfields, technology groups Gijima and Beget, golf estate developer Pinnacle Point, low-cost-housing developer RBA Holdings, hotel operator Queensgate, building supplies groups Distribution & Warehousing Network and WG Wearne, meat group Best Cut, asset manager StratCorp and low-cost airline 1Time.
The FM, for the record, is not encouraging anyone to invest in penny stocks, unless it’s mobilising petty cash for a cheap thrill or a bit of fun away from the mainstream market.
But for those determined to venture into penny stocks, there are some basic rules. First, avoid companies with "hard luck stories" or fanciful plans. In other words, be wary of executives who make the same excuses about poor performance year after year. Rather, look at companies whose management is pragmatic and honest in addressing challenges.
Do not get taken in by executives promising a new strategic tack that will change the company’s fortunes.
Nutritional Holdings, a specialist food company, made a sudden shift into the cannabis sector — accompanied by plans to launch a cryptocurrency that might best be described as an exercise in sock-smoking. The share has been suspended on the JSE.
It’s probably best to avoid companies that need to cull debt.
Inevitably, a rescue party will inject fresh cash via an issue of shares — a lot of them — at a heavily discounted price, which dilutes the little value left for existing shareholders.
One key consideration is corporate governance. Is the board hosting AGMs on time and in an orderly fashion? And, more important, are the executives delivering financial results within the JSE’s deadlines? Tardiness in this regard is a red flag.
And check the financials carefully for the auditor’s opinion, which might be the best reality check for any optimistic spoutings from the chair and the CEO in the annual report.
Having said all that, here are five shares to look at:
WATCH: Visual International (10c)
Visual listed as a property developer, but never really got its business model off the ground. The share was suspended in July 2019 after the company failed to submit its financial statements on time.
Visual was recently reinstated on the JSE after investment company Verityhurst injected much-needed capital. The company suggests its property projects will resume, but things took an unexpected turn when Verityhurst founder and CEO Mandla Lamba proposed reversing his electric vehicle manufacturing operations (Agilitee) into Visual.
While this might pique the interest of shareholders, especially those captivated by Elon Musk’s endeavours at Tesla, there is much detail that needs to be scrutinised before any investment decision can be taken. The purchase value of Agilitee still needs to be established — a key issue since Visual will be settling the deal in scrip.
Agilitee’s financial statements should make interesting reading as well. For the record, Visual’s last stated NAV was –4.35c a share, compared with a market value of R40m.
AVOID: Imbalie (4c)
This beauty products company has struggled for the longest time, and the last desperate hopes of something good emerging fizzled when negotiations to reverse-list Wepex Geotechnical and Makgarapa Products into the company were called off.
The beauty products business, already in ugly shape, took further pain over the lockdown — so much so that a much-needed loan from Absa was premised on the company delisting from the JSE.
In short, the operating assets will be sold and placed in a special purpose vehicle. Exactly how shareholders will benefit from this is not clear yet. But Imbalie has surged off its 1c low, and is reflecting a market value of R27m. This is well above the tangible NAV of 1.35c a share and NAV of about 2c a share stated in the latest accounts.
SPECULATIVE BUY: Ellies (9c)
On paper, Ellies — which manufactures and distributes satellite dishes, terrestrial aerials, TV brackets and related products — seems to be managing its turnaround well. In the interim period to end-October 2020, revenue was up about 2% to R656m, with after-tax profits swinging to nearly R13m (after a 2019 loss of R30m). Headline earnings came in at 2.37c a share.
On a numbers basis the share looks awfully cheap — but, of course, rapid changes in the broadcasting market might raise questions about the longer-term relevance of Ellies’s offerings. Investors will hope the full-year numbers show not only further evidence of sustainable profitable traction, but also the company’s ability to stay abreast of changing habits in local viewership. Tangible NAV was reflected at 20.8c a share at the end of the interim period, which is more than double the current share price.
AVOID: Afristrat (1c)
Afristrat is the new guise for the old Ecsponent financial services group. Despite the new corporate identity, the same old problems dog the group.
Ecsponent was funded mainly by issuing high-yielding preference shares. In 2019 the cracks started showing, and Ecsponent had to concede it could not service (or even settle) its preference share obligations.
The group’s determination to back emerging-markets banking group MyBucks also cost it plenty. Debt of more than R2.3bn was restructured, and there are plans to sell noncore assets.
But Afristrat, by its own admission, needs a substantial injection of capital. That, under the circumstances, won’t be easy to secure. At a can’t-go-lower price of 1c, Afristrat — which has an astounding 59.5-billion shares in issue — carries a market value of close to R600m. A 100-for-one share consolidation would be a most telling exercise.
SPECULATIVE BUY: Aveng* (4c)
Aveng has been called the ultimate penny stock — possibly because the company was once JSE royalty and a kingpin in the local construction/engineering sector. It’s been an arduous few years for Aveng, but the company can count on some strong shareholder support.
Two recent capital raisings have seemingly got the remaining operations — mainly Moolmans (an opencast miner and shaft sinker in SA) and McConnell Dowell (an engineering company in Australia) — on their feet. The operating earnings of these two businesses was a not insubstantial R293m in the half-year to end-December. Debt is markedly lower, and operational structure is leaner and meaner.
Full-year earnings predictions are difficult because of the brittle nature of the trading environment here and abroad, but it seems safe to assume headline earnings of at least 1c a share in a worst-case scenario. Make no mistake, though, it’s still a tough gig for Aveng. The sooner the shares are consolidated on a 100-for-one basis, the better.
A potential X-factor could be the sale of profitable Trident Steel, which might surprise on the upside considering the marked improvement in the trading environment for this metal of late.
SPECULATIVE BUY
*The writer has shares in Aveng
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