2 penny stocks to buy in October

Record profit in one case and signs of green shoots of recovery in the other have put these two penny stocks on this Fool’s shopping list.

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Penny stocks Pan African Resources (LSE: PAF) and Schroder UK Public Private Trust (LSE: SUPP) — the former Woodford Patient Capital Trust — have share prices of 16p and 33p respectively.

I’ve been keen on PAF for a while. Its shares were trading as high as 26.5p early this year and I think the current price is a good opportunity for me to buy. Meanwhile, recent developments at SUPP have persuaded me to add it to my buy list for the first time.

Assets and risks

PAF describes itself as a safe, high-margin and long-life South African-focused gold producer”. Its current producing assets are Barberton Mines (comprising three mines), Barberton tailings retreatment plant, Evander Mines’ 8 Shaft Pillar, and Elikhulu tailings retreatment plant. It also has two major near-term development projects.

Operational setbacks are often a risk with mining companies, but I think PAF’s multiple assets help mitigate this risk. Licensing and labour disputes are also risks. I like that Barberton Mines’ mining rights have recently been renewed for a further 30 years, also that it’s successfully concluded multi-year wage agreements with the two unions that represent the majority of employees.

This penny stock is delivering

In recent results for its financial year ended 30 June, PAF reported a 12% increase in gold production to 201,777 ounces. It also posted a record profit after tax of $75m and a highest-ever dividend of 1.26671 cents (0.91556p). The dividend may not sound much, but remember, this is a penny stock. The yield at the current share price is 5.7%. I think this is very attractive, and see a valuation of 5.7 times earnings of 3.87 cents (2.8p) as appealing too.

Additionally, the board has approved the start of a share buy-back programme. Details on this are to come, but it’s a further reason for me to buy PAF.

Destruction of value

When Neil Woodford’s eponymous investment trust reported maiden results in 2015, net asset value (NAV) per share stood at 102p. By October 2019 — when the disgraced Woodford resigned and the board announced Schroders would be taking over as investment manager — NAV per share had declined to 63p. The trust was also burdened with a £111m bank overdraft.

It was renamed Schroder UK Public Private Trust and the new managers set about clearing up Woodford’s mess. Asset sales and write-downs of holdings on the books at elevated valuations have been the order of the day. However, I think things are looking up.

Can this penny stock deliver?

I was encouraged by the trust’s half-year results earlier this week. The bank overdraft has finally been repaid and there have been positive valuation events at several investee companies. Furthermore, management has been able to make new investments for the first time. It’s taken stakes in private companies Tessian (cybersecurity) and Revolut (neobank). And it made an initial investment in FTSE 100 chemicals specialist Johnson Matthey.

Period-end NAV per share was 40.65p, while the shares are currently at a 19% discount. There’s still a risk of some write-downs. There are one or two holdings whose valuations look dubious to me.

However, I reckon the worst is over and the trust could benefit from both an improving performance and a narrowing of the discount. This may not happen if write-downs persist and investor sentiment weakens. But on balance, I think now could be a good time for me to buy.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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