Many UK penny shares look very undervalued today in the eyes of City analysts. And while there’s no guarantee that the small-cap market will soon stage a stunning turnaround — it’s been out of favour for ages now — there will undoubtedly be hidden gems in this space.
One penny stock that has caught my eye is Pebble Group (LSE:PEBB). Or more accurately, the 95p price target given by analysts at Liberum Capital earlier this month did, because it’s 90% above the current share price of 50p.
Moreover, this was a reiteration from July, meaning the analysts continue to be bullish on this stock.
What it does
The Pebble share price has fallen around 50% in five years, giving the firm a £74m market cap. So we’re looking at a small company here. It listed in late 2019 and is down roughly 60% since then.
The company operates two businesses. Facilisgroup is a digital platform that provides business solutions for SME promotional product distributors in the US and Canada. Meanwhile, Brand Addition sells and distributes promotional products and branded merchandise to large, global companies.
Sound fundamentals
I see a number of things to like here. For starters, this is a very large niche market. According to the Advertising Specialty Institute (ASI), the US promotional products industry reached a record $26.6bn in sales last year, despite a tough economic backdrop.
Also, unlike many penny stocks, Pebble is regularly profitable. In 2024, it recorded an operating profit of £6.2m, up from £4.1m in 2020. Next year, the company’s earnings per share (EPS) are expected to grow 16%.
Based on this forecast, the stock’s forward price-to-earnings (P/E) ratio is 11.3. That’s not a particular high multiple, especially when we consider that Pebble had a net cash position of £6m in June.
The stock also pays a dividend. Currently, the forecast yield is 3.5%, and this prospective payout is easily covered by expected earnings.
Finally, the company recently confirmed that full-year results are expected to be in line with market expectations (around £128m in revenue and a net profit of £6.3m).
CEO Chris Lee said this outlook was supported by new contract wins at Brand Addition and 18 new Partner wins at Facilisgroup. And this was “despite a challenging economic backdrop in which marketing budgets are being tightly held“.
Recession risks
This last comment about a challenging market is a worry for me. Tariff uncertainty is fuelling fears of a recession, which isn’t ideal for the promotional products market.
Barclays puts the chance of a US recession at 50/50.
In H1, Pebble’s revenue dipped 4% to £58.6m, while pre-tax profit fell 10% to £2.6m. Looking ahead to next year, revenue is forecast to come in at about £133m. That’s basically the same as 2022, indicating that there’s not much top-line growth here.
My move
I think there’s a lot to like about Pebble. It has regular profits, balance sheet strength, and a well-covered dividend. It’s much higher quality than most other penny stocks, and I think it could do well from 50p, especially if economic uncertainty clears.
However, I find the current rate of growth underwhelming. Weighing things up, I think there are better small-cap shares out there today for my own portfolio.
