There are many penny stocks out there today with a lot of growth potential. There are even some, like Pan African Resources (LSE: PAF), that I feel combine significant growth potential with dividend income. To me, that’s quite a potent mix. I even think the shares could more than double from their current share price, which is just around 16p each at the time of writing. So I’m very likely to buy the shares.
Why I think this penny stock’s price could double
Taking a price to earnings (P/E) ratio of eight, which would still make the shares ‘cheap’ by conventional standards, and then taking the estimated earnings per share for 2022 of 5.18p, I calculate we can get a target share price of 41.5p (that is, eight times the EPS), or thereabouts. The estimated earnings per share figure comes from analysts at Edison. Incidentally, they value the shares more conservatively at around 28.04p. Even on that more conservative target price, there’s still potential for the stock to almost double in value.
Admittedly my calculations are for a best-case scenario as they would require the share price to hit an all high time – and by quite some margin. But here’s why I think the shares could possibly re-rate and achieve a higher valuation.
Getting more value and a higher share price
Edison predicts that PAF’s revenue will go from US$218.8m in 2018 up to $340.9m in 2022. Profit before tax over the same period should grow from $37.1m to $144m. This performance should in itself lead to a higher valuation than Pan African Resources currently has.
While UK miners generally have low P/E ratios right now, that’s not the same for overseas-listed gold miners. Barrick Gold has a P/E of around 13. I feel that puts Pan African Resources’ low P/E, which is currently four, into perspective. Newmont, listed in the US, has an even higher rating at 15. Even UK-listed Centamin has a forward P/E of 10. Going back to my share price target, I think this shows a P/E of eight is realistic.
In recent results for its financial year ended 30 June, Pan African Resources reported a 12% increase in gold production to 201,777 ounces. That followed 179,600 ounces of gold mined in 2020. So the direction of travel is good and it’s operating well.
Falling debt at the firm should also help boost the future earnings per share as less revenue goes towards debt repayment.
Of course, things may not turn out the way I hope or analysts expect if the gold price falls. It’s worth me keeping an eye on that. But gold is often seen as an inflation hedge (that is, a good investment when inflation is rising), so my bet is on gold prices rising and demand increasing. Another risk is that by being based in South Africa, investors may punish the shares for any political volatility there. That could hold back the share price.
As with any share, things could go wrong and the share price could fall. Though over the next 15 months to two years, I really think Pan African Resources penny stock has a chance of doubling in value. That would be a great return and so I’m keen to add it to my portfolio.
