Buying penny stocks means investors take on an increased chance of volatility. But the potential rewards on offer can sometimes make taking the risk worthwhile.
One small-cap share I’ve just bought is Ramsdens Holdings (LSE: RFX). This financial services group offers foreign currency exchange, pawnbroking loans, and the buying and selling of jewellery.
Here’s why I think this AIM-listed stock could be smart long-term buy.
Cost-of-living crisis
With UK inflation near a 40-year high, ‘pledge lending’ has reached record levels for pawnbrokers. That’s lending secured against a customer’s valuable items, such as watches or jewellery.
The unfortunate reality is that many people need instant cash. But banks are currently more cautious about lending than at any point since the 2007-2008 Financial Crisis. So people are resorting to pawnbrokers as an alternative to payday lenders, which are being clamped down on by regulators.
All this is starting to show up in Ramsdens’ financials, as we can see in its latest half-year report (to 31 March).
- Gross revenue increased by 33% year on year to £39m
- Pre-tax jumped 68% to £3.7m
- Jewellery retail revenue increased by 32% to £17.3m
- Online jewellery retail sales surged 89% to £3.7m
- Pawnbroking loan book grew 29% to £9.7m
- Foreign currency exchange gross profit rose 41% to £4.9m
Expanding business
During H1, the company opened six new units in Bootle, Basildon, Bradford, Croydon, Maidstone
and Warrington. This brought its total store number to 158, excluding two franchises. The average unit generates roughly £0.5m in annual revenue.
It plans to open six more in H2, adding to what’s already an impressive retail footprint.
For context, its rival H&T Group, the UK’s leading pawnbroker, has 273 stores. So Ramsdens isn’t too far behind, and management sees “attractive consolidation opportunities in what remains a highly fragmented market“.
A grand a year in passive income
The interim dividend was hiked 22% to 3.3p per share. So brokers now expect the company to pay 10.4p per share for this financial year and 11p next year.
Now, broker forecasts sometimes prove inaccurate and dividends aren’t guaranteed. But the FY2024 estimate gives the stock a forward-looking dividend yield of 5%. That means I’d need around 9,100 shares at 222p for £1k a year in passive income.
They would cost me just over £20k, which is admittedly a fair chunk of money. But the stock is cheap with a forward-looking P/E ratio of 9.3. Plus, the dividend is reassuringly covered 2.5 times by trailing 12-months earnings. So there’s a lot to like here, I feel.
The three balls
The symbol seen on all pawn shops is three balls suspended from a bar. This is attributed to Saint Nicholas, the patron saint of pawnbrokers, who is said to have given a poor man’s three daughters a bag of gold each so they could get married. Others link the symbol to the Medici family of Florence during the Renaissance.
Either way, the time-honoured pawnbroking business is a potentially lucrative one to be in, as Ramsdens is proving.
Long term, industry regulation could be a risk, while sales momentum could slow in the short term. But with Christmas approaching and consumers needing cash, or possibly second-hand jewellery for gifts, growth at the company should continue.
