Could Hornby plc, Ithaca Energy Inc. & Game Digital plc double in the next 6 months?

Roland Head takes a look at three small caps with big potential: Hornby plc (LON:HRN), Ithaca Energy Inc. (LON:IAE) and Game Digital plc (LON:GMD).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After a tough six months, is there now fresh hope for Hornby (LSE: HRN) shareholders?

No worse than expected

The model toy and train company announced its annual results this morning, alongside details of an rescue share placing. Hornby will raise £8m at 27p per share. That’s an impressively small 15% discount to Tuesday’s closing price of 32p.

However, Hornby warned the market this morning that the company’s future may be in doubt if shareholders don’t approve the placing. A new £10m lending facility that’s needed to refinance Hornby’s net debt of £7.2m won’t be approved if the placing doesn’t go ahead.

Last year’s results were no worse than expected. Revenue fell by 4% to £55.8m and the firm made an underlying pre-tax loss of £5.7m. Hornby suffered badly with IT and supply chain problems last year, which the firm says contributed to poor sales.

Under the guidance of new chief executive Steve Cooke, Hornby now plans to cut its product range by 40% and focus on core brands and markets. The firm also plans to make significant cost savings and deal with a sizeable overhang of unsold stock from last year.

In my view, big gains are possible — but significant risks remain.

Lower costs for key oil project

Shares in North Sea oil and gas producer Ithaca Energy (LSE: IAE) edged higher on Wednesday, after the firm said that operating costs for its flagship Greater Stella Area (GSA) project would be lower than expected.

The expected savings are the result of Ithaca being given an opportunity to use a pipeline connection that’s been relinquished by another operator. First production from the Stella field is expected in late September 2016. Exporting oil by pipeline rather than tanker will save cash when the pipeline connection is completed in 2017.

Ithaca shares have risen by 132% so far this year and are no longer an obvious bargain. In particular, I’m concerned about the firm’s $630m net debt. However, Ithaca has some hedging in place through to mid-2017.

The firm also expects operating costs to fall to $20/boe when Stella production starts. This should allow the firm to start repaying its debt by the end of this year. In my opinion, Ithaca could deliver further gains for shareholders.

Woodford is backing this stock

Unlike Hornby and Ithaca, Game Digital (LSE: GMD) is already profitable. However, this hasn’t stopped the group’s share price from falling by 70% over the last year. A profit warning just before Christmas did most of the damage, but Game Digital isn’t a basket case.

Game is now expected to report earnings of 9.7p per share for the year ending 25 July. This puts the stock on a forecast P/E of 8.2, with a prospective dividend yield of 6.4%.

The firm’s big strength is that it has plenty of cash. Net cash was reported as being £120m at the start of January. Although this probably represents a seasonal high, the group’s ability to generate free cash flow is significant. Results for the first half of this year suggest that the dividend should be comfortably covered by free cash flow.

Neil Woodford’s funds own a slice of Game Digital, and I can see why. If trading stabilises, this company has the potential to generate a generous stream of cash for shareholders.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Down 29% to under £4 and with a P/B of just 1.2, is BP’s share price a must-buy opportunity for me?

BP’s share price has dropped in recent weeks, which raises the possibility of a bargain to be had in addition…

Read more »

Investing Articles

Shares in this iconic FTSE 250 car firm are down 53% this year, so is it time for me to buy?

This celebrated FTSE 250 car company has seen very tough times recently, but its Q3 results looked more positive, so…

Read more »

Investing Articles

What’s going on with the BT share price? Analysts say it’s undervalued

The BT share price has demonstrated plenty of volatility in 2024. Dr James Fox explain why this is and what…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

3 FTSE 250 stocks I’m considering buying for the long run

Our writer Ken Hall takes a look at three FTSE 250 stocks across different industries that he considers to be…

Read more »

Young female couple boarding their plane at the airport to go on holiday.
Investing Articles

Up 75%! But is the IAG share price likely to crash in 2025?

The International Consolidated Airlines (IAG) share price has gone parabolic recently, but here's the potential danger ahead.

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

2 FTSE 100 shares with strong growth prospects for 2025

Sometimes the best growth prospects aren’t in the most obvious stocks. Stephen Wright looks at two FTSE 100 firms he…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Which Coca-Cola shares are best for dividend investors to consider?

When it comes to Coca-Cola shares, dividend investors are spoilt for choice. But what’s the difference between the UK-listed stocks…

Read more »

Young Caucasian girl showing and pointing up with fingers number three against yellow background
Investing Articles

3 ISA mistakes I made

Learning from others’ mistakes is one way to make sure you don’t make the same ones. Here are three ISA-related…

Read more »