I’m currently searching for penny stocks to buy. Due to their strong potential for share price appreciation, I’d like to boost my exposure to small companies.
Although they have greater volatility risk than more established FTSE 100 shares, I think penny stocks deserve a place in my portfolio. After all, thanks to a low cost of entry and the possibility to benefit from big gains, I’m comfortable taking on additional risk at present.
One stock that currently trades under 11p has attracted my attention. I’m referring to restaurant chain operator The Fulham Shore (LSE:FUL), which owns Franco Manca and The Real Greek. Here’s my take on the outlook for this hospitality business.
A cheap valuation
The Fulham Shore share price fell nearly 26% over the past year. It currently has a market-cap under £69m. I think the stock is oversold, which means today’s price looks like an attractive entry point for me.
First, it’s important to acknowledge the reasons for the sell-off. Profitability is a concern. In the latest interim results to 25 September 2022, the group’s post-tax profit slumped to £0.3m, down from £2.4m the year before.
The company was buffeted by external factors that subdued trading activity. High inflation has negatively impacted consumer confidence and put pressure on the firm’s margins. In addition, train and tube disruption hurt the group’s sales, especially at its urban locations.
I’m optimistic that while risks remain, trading conditions will normalise as the year progresses. Inflation is expected to fall due to the Bank of England’s interest rate hikes and there’s potentially positive news regarding rail strikes as the RMT union is due to hold a membership vote on a new pay offer.
Overall, the difficulties facing the company appear to be easing, and I don’t think today’s valuation has fully priced that in yet.
An appetising outlook
I also believe there are plenty of robust numbers in the firm’s financials, despite disappointing profits. Revenues increased 26% to £49.9m and EBITDA remained flat at £10.5m. Plus, the company has a healthy cash flow and low debt levels.
What’s more, it’s encouraging that the business significantly expanded its footprint last year. During the interim period it opened 11 new Franco Manca pizzerias and two new The Real Greek restaurants. This brings the group’s total to 93 restaurants in operation as of 25 September.
International expansion is another compelling reason to invest. The Fulham Shore has secured a new franchise territory agreement for Spain, which it sees as a potential major market. This builds on the firm’s progress following a similar deal for Greece in November 2021.
In addition, Franco Manca cook-at-home pizzas are now available to purchase at over 500 Tesco supermarket shelves. I think this could be a lucrative revenue stream and it diversifies the business model, which I view as a big positive.
Why I’d buy this stock
Overall, I think this penny stock looks like a good buy for me. If I had some spare cash, I’d invest in the company today.
Recent financial results show underlying resilience in the face of macroeconomic challenges and the business continues to expand and evolve its offering.
Under 11p, The Fulham Shore shares look tasty to me.
