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).

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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.

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