Investing in penny stocks can be notoriously risky. These small enterprises often have unproven business models and flimsy fundamentals. And despite being priced at 2p, say, there’s nothing to stop a penny stock falling another 50% to 1p (or below!).
That said, if investors can find the right small-cap share, the gains can be very lucrative. We’ve seen that recently with Filtronic, a former penny stock that has rocketed 627% since the start of 2024 due to a game-changing partnership with SpaceX.
DP Poland at a glance
One penny stock I think has a lot of potential is DP Poland (LSE: DPP). The AIM-listed company operates the Domino’s Pizza franchise across Poland and Croatia.
At the end of March, the group had 120 stores under the Domino’s brand (115 in Poland and 5 in Croatia), and 90 stores under Pizzeria 105, following a recent acquisition.
In 2024, revenue jumped 20.2% year on year to £53.6m, with strong like-for-like (LFL) sales growth of 17.9% in local currencies. This was the firm’s third consecutive year of double-digit LFL sales growth.
Management says performance was “driven by a significant rise in order volumes and successful customer acquisition initiatives.” It’s also got a well-oiled delivery operation, as one would expect from Domino’s, which is increasingly popular in Poland.
Impressively, last year’s average weekly order count reached 827, a 13.2% increase. And trading in the first few months of this year is off to a good start.
Moving towards profitability
There are a handful of things I like here. The strategic acquisition of Pizzeria 105, the fourth-largest pizza brand in Poland, accelerates the firm’s push towards operating 200 Domino’s stores by the end of 2027.
We are positioned to become the leading player in the Polish pizza sector in the coming years.
David Wild, DP Poland Non-Executive Chair
This acquisition, which cost £8.5m, also fast-tracks the group’s transition towards a predominantly franchised, capital-light model. Pizzeria 105 already operates a 100% franchised network of 90 stores, and this deal gives Domino’s an additional presence in 31 new Polish cities.
The company ended the year with a debt-free balance sheet and £11.3m in cash. And losses narrowed significantly, falling to £0.5m from £5m the year before. Adjusted EBITDA jumped 37.6% to £4.8m.
Risks to bear in mind
Encouragingly then, DP Poland appears to be moving towards profitability. But a key risk here is that the firm has quite a long track record of losses, and this shouldn’t be ignored.
There’s also lots of competition in Poland, with more restaurants and takeaways offering home delivery options.
Meanwhile, any spike in inflation could increase the cost of raw ingredients, as well as put pressure on consumer spending. In this scenario, the march towards profitability could suffer a setback.
Worth a look
The stock is down 21% since March and now trades at just under 10p. This gives DP Poland a £90m market cap and reasonable price-to-sales ratio of 1.7.
Due to the risks involved, I only have a small position in the stock. But I think it has solid growth potential and is worth considering.
Over the next few years, disposable incomes are expected to rise in Croatia and Poland (two of Europe’s fastest-growing economies). Consequently, management thinks there’s potential for 500+ locations over the long run.
