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Two of the penny stocks on my watch list right now are trading significantly below City brokers’ price targets.
Should I consider buying either of these shares today? Let’s take a look.
OMG: a bargain buy?
Tech group Oxford Metrics (LSE: OMG) currently has a market cap of £77m and a share price of about 60p.
However, the group also has net cash of about £45m. This bumper cash pile is the result of the sale of the group’s Yotta business for £52m in 2022.
What this means for shareholders is that the remaining Vicon business is effectively being valued at around £32m. The remainder of the market cap is covered by net cash.
Vicon makes motion capture systems used in television and video game production. It looks a decent business to me.
Broker forecasts show Oxford Metrics’ earnings rising by 36% to 2.9p for the 24/25 financial year. That puts the stock on a forward price-to-earnings (P/E) multiple of 20.
However, if I strip out the group’s net cash, this multiple drops to just 8.3.
In addition to this, the shares also offer a useful 5% dividend yield.
For me, the risk is that management will spend the company’s cash badly. They may pay too much for acquisitions. Or they may buy businesses that subsequently fail to perform.
I reckon these risks help to explain why Oxford Metric’s current 60p share price is a long way below City brokers’ average price target of 147p.
Even so, I’m interested. I plan to do some further research on this business.
Turnaround time
Last year’s Hollywood strikes may have seemed a long way from the UK. But the disruption they caused had a significant impact on UK companies involved in television production.
One such business is Facilities by ADF (LSE: ADF), which provides mobile production facilities to the UK film and TV industry.
This AIM-listed small-cap floated in January 2022. It currently has a market cap of £55m and a share price of 51p.
When I looked at ADF after its IPO, I was impressed. The company was generating double-digit profit margins and strong rates of growth.
Unfortunately, things have gone off track. ADF’s recent half-year results revealed a 30% drop in revenue during the first half of 2024, compared to the same period last year.
Another concern for me is ADF’s decision to expand through acquisitions. A recent deal for a portable roadway business looks fine in itself, but it will cost up to £21m. That’s nearly half the current market cap.
The good news is ADF’s core markets seem to be returning to normal:
Trading at the end of H1-FY24 finished strongly, with the order book for the second half of the year building well across the summer months as momentum returns across the market following the Strikes.
– Facilities by ADF
At around 51p, ADF is trading on a 2024 forecast P/E of nine, falling to a P/E of just five for 2025. Brokers have an average price target of 93p on the stock.
I certainly think the shares could be worth more if the business can return to growth. However, it’s a recent listing and has just made a big acquisition. I’m going to stay on the sidelines for a little longer yet.
