Just because a share sells for pennies does not mean it is good value. Many penny shares end up destroying far more shareholder value than they create.
But not all do and I own some in my portfolio. Here are two I am watching this month, for different reasons.
Topps Tiles
I already own some shares in Topps Tiles (LSE: TPT) and to date they have been a crashing disappointment.
But if the share price moves down enough this month, I will be happy to add some more to my portfolio. It was briefly below 30p during March and at that level, I would see the share as a potential bargain, albeit a risky one.
The risks are linked to a number of factors, but a key one is customer demand. If the housing market is weak, demand for tiles and floor coverings could fall. On top of that, Topps’ ambitious growth plans could distract management from keeping the basics running smoothly.
The other side of that coin, though, is that if those growth plans succeed, Topps could generate a lot more revenue and profit than it does now. Over the medium term, management aims to grow turnover by around 47%.
The penny share pays a dividend and expects this year’s full-year payout to be at least as high as last year’s.
Topps ended the first half of its financial year with just £1.2m of net debt. So far this year, sales have been growing. I think the company’s strong market position, and wide range of sales platforms both online and offline, combined with deep industry expertise could all potentially help it unlock more value in future.
AFC Energy
I continue to think that there could be strong opportunities for some renewable energy shares. The challenge, as always, remains figuring out which ones and at what price!
AFC Energy (LSE: AFC) has been on my radar for a while. The share sells for pennies and jumped around 30% last week after it announced an agreement to jointly develop a range of small-to-large-scale, highly efficient, ammonia crackers for hydrogen production with an unnamed “leading global industrial S&P 500 company”.
Not only could that potentially unlock large future revenue streams for AFC Energy, but it may also end up acting as an important proof of concept that helps attract more clients.
But while I will be eyeing AFC in coming months to see whether there is further news that can transform the company’s prospects, for now I have no plans to buy the share.
Revenue surged last year but remains small, at £4m. The company continue to bleed red ink. Last year saw AFC Energy post a post-tax loss of £17.4m, after losing roughly the same amount the prior year too.
That is not a sustainable business model for the long term. So while I see AFC’s technology as potentially a strong asset – and think this week’s news helps support such a view – I want to see far more evidence that it is on a clear path to profitability before I would consider adding the share to my portfolio. I will be watching to see if that is delivered.
