We invest in a penny stock in the hopes it will advance above a pound and lose that status. Netcall (LSE: NET) shareholders aren’t far from achieving that in just 12 months. A year ago, the Netcall share price stood at 39p. Today, it’s soared to 80p.
That’s a very nice 110% gain, and the shares have even been a bit higher. The price reached 89p at the end of September before dropping back a little. So what’s happened? Is there more to come, and am I too late to get in on this growth story?
The dream 12 months kicked off just ahead of full-year results released on 13 October 2020, and the shares have kept on up ever since. But move forward a year to 6 October with results time again, and we see the opposite’s happening. Since the market closed the day before, the Netcall share price has lost 6%.
Revenue rose by 8% to £27.2m, in line with expectations. And, perhaps more significantly, cloud business revenue increased 26% to £8.3m. Adjusted EBITDA is up 21% to £5.34m, and pre-tax profit up 98% to £0.99m. And the dividend’s also up 48% to 0.37p.
Netcall ended the year with cash of £14.5m (up 14%), against borrowings of £6.86m (up 1.6%). Many a penny stock shareholder would be envious of that.
Cloud-based transition
Chief executive Henrik Bang said: “We are pleased with the solid performance for the year driven by demand for our cloud-based Liberty offering, resulting in 26% growth in cloud business revenue and a significant increase in profitability as Netcall continues the transition to a cloud business mode.”
Might the transition word suggest reasons for hesitancy? I mean, we do often see it used to mean something’s gone wrong, and a company needs to make some changes sharpish. So what is being transitioned?
Netcall provides software for companies to automate their process and their customer services. It does seem to be popular, and the cloud transition thing just looks like a natural technical progression to me. So I’d say the shift to this cloud-based Liberty platform looks good.
The company reported adjusted diluted EPS of 1.43p (up 47%). On that basis, the current Netcall share price gives us a P/E of 56. And that seems a bit high.
Perhaps the push beyond penny stock status won’t be here just yet. Still, if we should get another year like this one and another 47% EPS growth, the P/E would come down to 38. And for what I see as solid growth potential, that would start to look reasonable.
Penny stock surge?
But Netcall shares have had false starts several times over the past five years. And though the price has more than doubled over the past year, it’s only about 5% higher than the peak it reached in 2018. Earnings in 2018 were higher than this year too, and took a dive by June 2019. Maybe there’s more to this transition thing after all.
I do think I’m seeing attractive growth potential here, and I suspect I’ll lose out buy not buying. But the current valuation, coupled with the volatility in both earnings and share prices, means I don’t see enough safety margin.
I’ll wait and see if the earnings growth of the past couple of years proves sustainable.
