Many investors are reluctant to buy small caps due to the higher risk that can come from them often having fewer financial resources and lower profiles. This is not the case for all of them, however. One penny share I’m considering adding to my holdings is Bakkavor (LSE:BAKK). Should I buy the shares?
Fresh food
As a quick introduction, Bakkavor is a fresh food manufacturing business. It prepares, packages, and sells freshly-prepared foods like salads, desserts, and pizzas and sells these to major supermarkets including UK giants such as Tesco, and Sainsbury’s. It has operations here in the UK, as well as growing presence in China and the US.
A penny share is one that trades for less than £1. So what’s happening with Bakkavor shares currently? Well, as I write, the shares are trading for 84p. At this time last year, the stock was trading for 131p, which is a 35% decline over a 12-month period.
Risks to note
Recent macroeconomic headwinds such as soaring inflation, the rising cost of materials, and a global supply chain crisis, could impact Bakkavor negatively. Operations and sales could be affected by the supply chain issues. And rising costs could eat into profit margins which could affect returns and any dividends paid to shareholders.
Bakkavor has some high profile contracts, especially here in the UK, as noted above. A loss of one of these contracts could be catastrophic for the business. This is because at present, 90% of Bakkavor’s revenue is derived from its UK operations. If this were to happen, performance and returns could be seriously affected.
Why I’d buy this penny share
So to the positives. Firstly, Bakkavor operates in a high-growth sector with defensive capabilities too. The ready-to-go food market has grown exponentially in recent years. I believe this is due to the busy lifestyles we tend to lead these days. With restrictions linked to the pandemic seemingly behind us, this growth should continue. The defensive aspect of Bakkavor derives from food, especially easy to access, convenience food, being an essential staple for all consumers.
Next, Bakkavor shares would boost my passive income stream with an enticing dividend yield of just over 7%. The FTSE 100 average is 3%-4%. A penny share with such a high dividend yield is uncommon, in my opinion.
So what about Bakkavor’s share price value? Well, the shares look good value for money on a price-to-earnings ratio of just nine. A general rule of thumb is that a ratio below 15 could mean shares are trading for bargain levels.
Finally, Bakkavor’s performance track record is impressive too. I do understand that past performance is not a guarantee of the future, however. Looking back, I can see it has grown revenue for three out of the past four fiscal years, with 2020 being the exception due to the pandemic. Profit levels have also increased year on year for the past four years.
Overall, I believe Bakkavor could be a great penny share to add to my holdings. The shares look cheap and offer a juicy dividend yield that is underpinned by excellent performance in recent times. In fact, its 2021 performance surpassed pre-pandemic levels. This tells me that the business could continue its impressive growth trajectory in the future. I would buy Bakkavor shares for my holdings.
