Finding market-beating penny stocks is no easy feat. While plenty of these tiny enterprises boast about their enormous growth potential, few actually deliver on their promises. And there’s nothing stopping a 10p stock from crashing to 1p. Yet, at the same time, if such a company defies expectations, the market-cap can skyrocket overnight.
This week, DP Poland (LSE:DPP) caught my attention. The penny stock’s been quietly making progress over the last five years, and its share price is actually already up over 70% since September 2023. Yet if analyst forecasts are right, more chunky dividend growth could be just around the corner. At least that’s what a 17p price target suggests, versus the 10p shares that are currently trading at.
So what does DP Poland do? What’s behind the bullish forecast? And is now the time to think about buying?
Capital-light pizza
DP Poland’s a very similar business to another London incumbent – Domino’s Pizza Group. The company holds the master franchise rights for Domino’s Pizza in Poland and Croatia, operating a network of 122 stores. However, following its acquisition of Pizzeria 105 earlier this year, 90 new franchise locations have since been added to its network, which are in the process of being re-branded as Domino’s.
This deal’s a big catalyst behind the bullish sentiment. Beyond adding scale, it pushes the firm even further into its franchise-led, capital-light model while reaching new cities and customers overnight. The impact of this is only amplified by the rapid expansion of the online food delivery market in Poland, which is currently booming at a 50% annual growth rate. And a similar story’s beginning to emerge in Croatia.
Needless to say, having a market-leading brand, a debt-free balance sheet, double-digit revenue growth, and expanding profit margins is an impressive feat. And it’s especially rare for a penny stock trading at what seems to be a pretty cheap valuation. After all, its price-to-operating cash flow ratio sits at just 17.5 – half of its historical levels. So is this a screaming buy?
Taking a step back
There’s a lot to like about this business. However, even the most promising enterprises have their weak spots. And in the case of DP Poland, there are a few things investors need to carefully consider.
Profit margins have been expanding over the years, but the bottom line is still in negative territory, resulting in a long history of cash burn. As a result, the company’s been raising a lot of capital over the years, resulting in enormous equity dilution. For reference, the number of shares outstanding has surged from 153 million in 2018 to 920 million today.
With the company on the verge of entering the black, that may no longer be a prominent concern. However, this is also dependent on the acquisition of Pizzeria 105 going smoothly. That’s far from guaranteed, especially considering this is the firm’s first large-scale merger. Any hiccups along the way or weaker-than-expected sales from acquired locations could push margins back in the wrong direction.
All things considered, DP Poland seems to be an attractive opportunity right now. That’s why I think this penny stock deserves a closer look from investors seeking some exposure to the burgeoning Polish fast food market and geographic diversification.
