Gaming Realms

A change to gambling legislation is a constant threat to Gaming Realms (LSE:GMR). But the profits potential here remains immense as online gaming goes from strength to strength.

This UK share builds and licences casino games that are played on mobile phones and tablets. Its most famous franchise is the Slingo line of games, the popularity of which helped drive group revenues 27% higher in 2022.

Unsurprisingly Gaming Realms remains committed to developing its cash cow. It launched three new Slingo titles last year and signed an intellectual property (IP) agreement to release a Tetris-based game later in 2023.

I also like the company’s ongoing commitment to rapid expansion to boost user numbers. It has launched with 13 new partners in the year to date (including with Bet365 in the UK and Betway in Pennsylvania). I’m especially excited by plans for further launches in the gigantic US marketplace.

OnTheMarket

The dangers to Britain’s homes market remain severe as interest rates rise and the cost-of-living crisis endures. Property listings business OnTheMarket (LSE: OTMP) is one UK share that could suffer if housebuyer appetite remains weak.

Yet encouragingly the company continues to grow revenues at a rapid pace. And its technology-led approach is proving popular with major estate agency chains.

OnTheMarket is moving away from simply providing property listings. It’s designing technologies that provide a one-stop-shop for estate agents and housebuilders, its platforms also providing data and information management and marketing functions.

This provides considerable potential for earnings. And pleasingly the company has a strong balance sheet to help it develop its suite of tech products. It had cash of £10.4m on its books at the end of 2022.

Rainbow Rare Earths

Profits at commodities businesses like Rainbow Rare Earths (LSE:RBW) are very vulnerable during economic downturns. As consumers and businesses feel the pinch, the amount they spend on products loaded with metals can be impacted.

But this wouldn’t deter me from investing in certain mining stocks given that we’re likely on the cusp of a new ‘commodities supercycle.’ Demand for rare earth minerals (such as neodymium and praseodymium) is tipped to grow strongly too as the manufacturing of electric vehicles and renewable energy projects both heat up.

Rainbow Rare Earths owns the Phalaborwa mining project in South Africa and Gakara asset in Burundi. Both of these are significant sources of such minor metals. They also have other benefits like close proximity to good infrastructure and low cost bases when production begins. The profits potential here is colossal.

Mine development is a risky business and setbacks can place huge strain on the balance sheet. But Rainbow is well capitalised following a recent $7.52m share placing that will fund Phalaborwa through to early 2024. This provides an added layer of protection to investors and makes the stock worthy of serious attention, I feel.

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Does that mean it a good time to buy penny shares now? With a bit of care, yes, I think it is.

I’m looking at three here with market caps between £50m and £100m, and share prices between 50p and 70p. They’re all listed on the Alternative Investment Market (AIM).

Investment

Ebiquity (LSE: EBQ) provides investment analysis and marketing analytics.

We’ve seen losses for the past couple of years. But forecasts show a profit for 2022, with results due on 30 March.

Revenue is reportedly up by 20%, with organic revenue up 9%. A 12% operating margin is four percentage points up on the prior year.

There’s £8.9m of net debt. But against a market cap of £63m, that looks fine to me.

Profit forecasts suggest a price-to-earnings (P/E) ratio of around 20. And that’s not obviously cheap. But if the outlook for the next couple of years is accurate, we could see it plunge to only around seven by 2024.

Ebiquity’s business must be vulnerable to any extended economic downturn, and I think that’s the biggest risk.

But if profits are sustainable now, I think it could be a long-term buy.

Lithium

CleanTech Lithium (LSE: CTL) floated on AIM in March 2022 at 30p. Since then, it’s up 66%.

The company has two lithium prospects in Chile. And any investment is a play on the future of demand from the battery business.

There are no profits on the table yet. Or, in fact, any revenue. So CleanTech has got to be the riskiest of the three. But I think it has a few things in its favour over rival lithium explorers.

Its operations in Chile appear stable and uncontroversial, and it has plentiful renewable energy resources at its disposal.

And thanks to its IPO and subsequent cash-raising activities, it looks to be sufficiently funded at the moment.

The success of an investment will depend on how long it takes CleanTech to reach profit. And forecasts don’t go that far yet. But I’m tempted to risk a small amount.

Property

Property shares seem like poison right now. And OnTheMarket (LSE: OTMP), which provides a residential property portal for potential buyers, sellers, landlords, and tenants, has suffered.

The company has had a couple of very tough years, and its shares have been on a long, slow slide.

And, well, the 2023 outlook for the property market isn’t exactly the brightest I’ve ever seen. But forecasts suggest it could be a turnaround year for the firm.

OnTheMarket’s year ended in January, and the latest trading update looks good. Operating profit should be between £4m and £4.5m (up from £2.7m).

And there’s £10.4m in cash on the books, with no borrowings.

Forecasts indicate a big rise in profits, which could drop the P/E to around nine by 2025. Even with today’s property risk, I think that’s cheap.

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Roll with it

Toilet and kitchen roll manufacturer Accrol Holdings (LSE: ACRL) could face a rough ride as rising paper costs hit profits. But it’s my opinion that falling consumer spending power could supercharge demand for its lower-cost private label products and, by extension, profits.

Real wages in the UK are falling at their fastest rate since 2014 because of rocketing inflation, recent data shows. Consumers will have to shop more smartly to make ends meet, which bodes well for Accrol. But the penny stock is not just a great buy for today. The importance of good value to consumers has been rising steadily for more than a decade now.

And Accrol has remained busy on the acquisition front to exploit this opportunity. Recent major acquisitions include Leicester Tissue Company and John Dale.

Penny stock nobility

I’d also consider buying Lords Group (LSE: LORD) following recent share price weakness. Like Accrol, this building materials supplier has also been busy with M&A action to increase its scale. Since the start of 2022 alone, it has spent more than £26.8m to bring builders’ merchant AW Lumb and roofing specialist Advance Roofing Supplies under its wing.

This will give Lords Group better geographic and product coverage and therefore better chances to capitalise on the the booming Repairs, Maintenance and Improvement (RMI) market in the UK. The penny stock has designs on driving revenues to £500m by 2024 (it clocked up sales of £179m in the first six months of 2021, latest financials showed).

Shortages of raw materials are a problem that could push up costs and result in empty shelves at its depots. However, the company’s exciting growth plans still make this an attractive UK share for me right now.

Off to market

In usual times, stocks that have exposure to the housing market are in danger when economic conditions worsen. This is hardly a surprise as a weakening buyer affordability and consumer confidence hits homes demand. So with runaway inflation hurting the domestic economy shares like OnTheMarket (LSE: OTMP) might be considered risky ones to own.

But the reality is that home sales continue to impress despite the worsening economic outlook. A mix of historically-low interest rates and fierce competition among mortgage providers means that borrowing conditions remain extremely favourable. Ongoing government support through Help to Buy also means that market activity remains strong, causing British house prices to continue to rise at breakneck pace.

OnTheMarket allows homebuyers to search for properties through its online platform. And in late 2021, it unveiled a website and brand revamp to help it better take on industry giants like Zoopla and Rightmove. Strong market conditions prompted the penny stock to increase profits expectations in recent months. And I fully expect trading here to remain impressive for the foreseeable future.

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Could this threat be baked into Trifast’s current valuation, however? I think it could. At current prices of 140p, the bolt-builder trades on a forward price-to-earnings growth (PEG) ratio of 0.2. This leaves a wide margin of error for earnings projections to miss, in my opinion (City analysts currently expect profits here to rocket 81% in the fiscal year to March 2022).

As a long-term investor I like Trifast a lot. Revenues might suffer in the near term if car manufacturing issues continue. But I think its sales outlook for this decade is pretty bright as demand for zero emissions vehicles booms. I also like the company’s exposure to other fast-growing end markets like energy, medical, and infrastructure.

A high-risk penny stock I’m looking at

Bingo hall operator Rank Group (LSE: RNK), which also trades at 140p, is a share that’s not the faint of heart. The gambling giant suffered a shocker in 2020 and early 2021 as the Covid-19 crisis forced the closure of its estate. The invasion of the omicron variant on these shores raises the spectre of fresh lockdowns in the weeks and months ahead, too.

It’s high risk, therefore, but I also think this almost penny stock could ultimately prove high reward. So it’s my opinion that the recent share price weakness could provide an attractive dip buying opportunity for my portfolio. The popularity of bingo in Britain has boomed in recent times and is expected to continue growing. This bodes well for Rank, which operates Mecca bingo halls along with the brand’s online portal.

I also like Rank’s exposure to the fast-growing online casino market under its Grosvenor masthead. Net gaming revenues here ballooned 12% during the three months to September.

Market day

Property listings specialist OnTheMarket (LSE: OTMP) trades barely above the penny stock limit, at 102p per share. It has ducked back towards its former territory as concerns over omicron have risen. Signs that home sales are falling sharply hasn’t exactly helped confidence in the company, either. Home sales dropped by more than half between September and October, according to HMRC.

The possibility that housing demand will continue to sink in 2022 due to economic uncertainty and the reinstatement of full-fat stamp duty is possible. It’s my opinion, however, that homebuyer interest — and consequently traffic at OnTheMarket — will remain strong as low interest rates and intense competition among lenders will remain in play. Significant government help for first-time buyers should also keep business ticking along nicely.

OnTheMarket is looking to capitalise on this opportunity by improving its website and its brand over the next 12 months, too. Like Trifast and Rank, I think this cheap UK share could help me make a lot of money.

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Here are three top-quality penny stocks on my radar today. With £1,000 in my pocket this is why I’d buy them for my investment portfolio.

Playing the property boom

Trading at OnTheMarket (LSE: OTMP) has exceeded analyst expectations in recent times. The business — which operates the OnTheMarket.com property listings website — is thriving as demand for residential properties soars in the UK. Revenues at the business rocketed 46% year-on-year in the six months to June.

A mix of favourable lending conditions and support for first-time buyers has persisted, and last month the average price rose above £250,000 for the first time, according to Nationwide. I expect homebuyer demand to remain strong in the short-to-medium term too, in spite of upcoming Bank of England interest rate hikes. I’d buy OnTheMarket to exploit this theme, even though listings giants Zoopla and Rightmove pose a significant competitive threat.

Turkish delight

Gold miner Ariana Resources (LSE: ARR) first came to my attention last year when it released a stream of positive exploration updates. Since then, news on its drilling programmes at its assets in Turkey, as well as from the assets of other Eastern Mediterranean mining companies in which it holds stakes, have remained extremely encouraging.

For example, latest drilling action from Venus Minerals in late October — in which Ariana’s stake could rise to 50% as part of an earn-in agreement — revealed that the Kokkinoyia sector at the Magellan gold and zinc project in Cyprus is “significantly more exciting deposit than initially thought.”

While a falling gold price could hit Ariana’s bottom line hard, I still think this penny stock is a great way to get exposure to the safe-haven precious metal.

A penny stock with ambitious plans 

Budget greetings card retailer Card Factory (LSE: CARD) has ambitious plans to turbocharge revenues over the next five years. It plans to generate sales of £600m by financial 2026, up from the current peak of £451.5m recorded in 2020.

I think the business could make a decent fist of reaching this target for a couple of reasons. Firstly, it’s investing heavily in its digital operations to fully exploit the explosion in e-commerce. Secondly, value retail is tipped to be one of the megatrends of the decade as consumers demand more bang for their bucks.

Card Factory might not have things all its own way, of course. Online-only operators like Moonpig could provide a challenge to its growth target. So could fellow low-cost retailers like Cards Direct. But by offering the twin benefits of value and online I still think the penny stock could deliver impressive profits growth.

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In the company’s interim results announced in October 2019, On The Market Property described how the number of branches was up 28% in the year and how a growth in traffic had lead to a 75% increase in the number of site visits.

However, when it came to leads, the company has disappointed compared to Rightmove. But that could be just because Rightmove is much more expensive. It makes sense that spending more is likely to generate more leads; therefore, we would need to work out the cost per lead to determine the quality. 

Negative self-fulfilling prophecy

One of the reasons I feel this stock is one to avoid is because of its business model. The company wanted to compete with Rightmove in the online housing market, and to incentivise estate agents to sign up, the company gives away shares in the business to those estate agents who joined. 

This means that the more estate agents sign up, the more dilution there will be. Dilution is important because the number of shares in a business is crucial – anyone who is a current shareholder sees their percentage ownership in the business diluted when new shares are issued. As the price gets lower and lower, more and more shares need to be issued to the estate agents that sign up. It’s a negative cycle of destruction!

Cash position is weak

One of the most important factors in an unprofitable/growth business is the cash balance. This is because when a company is investing for growth, it usually relies on a series of fund raises from investors in order to keep the lights on and invest in the hope that one day the company will turn a profit.

But the cash balance at the end of September was £8.6 million. The company made a loss of just under £7 million in the six months ending 31 July 2019, and they burned through over £6.5 million in operational and investing activities, which we can see on the cash flow statements.

If we do the maths, then it doesn’t take a genius to see that the company is likely going to be out of cash by the end of March. That means another fund raise – and these fund raises are rarely at a premium to the current price.

Rightmove can see off this threat 

It seems to me that Rightmove just needs to lower its prices a little in order to strangle On The Market Property into submission. The company is the market leader, and I don’t think it will be feeling challenged by this estate agent-founded competitor anytime soon.

The post Why I’d sell On The Market Property right now appeared first on The Motley Fool UK.

In the case of OnTheMarket, the online property portal provider revealed a 14% rise in first-half revenue to £8m, though it’s a long way from profit territory just yet. A rise in administrative expenses of 23% to £14.8m, “primarily as a result of the group’s investment in its sales and IT teams,” led to an adjusted operating loss of £6.7m.

The bottom line is a loss per share of 11.16p (from a loss of 9.57p at the same stage last year), and the company reached 31 July with £8.8m in cash on its books, from £15.7m six months previously.

Record-breaking

CEO Ian Springett said: “We have delivered another set of record-breaking traffic and leads results for our estate and letting agent shareholders and customers,” and I do think the company is doing pretty well at this stage. So why do I feel so twitchy about it?

One obvious thing is the collapse of the Purplebricks share price, after that company greatly overstretched itself. But even without that, we’re looking at a competitive marketplace with Rightmove and Zoopla in the same space. And, as far as I can see, there’s little in the way of differentiation between them. Each can, I’m sure, point to their own unique features, but to most people it’s just buying and selling houses.

We’re also looking at a company that’s not yet profitable, with probably around six months of cash left at current burn rates, and facing an uncertain Brexit that could hammer the property sales business. It’s not for me.

Brexit uncertainty

Hargreaves Lansdown shares, meanwhile, dipped 2% after its latest quarterly trading update spoke of “new business in the period being impacted by weak investor sentiment arising from continuing Brexit and political uncertainty in the UK and wider global macro issues such as trade tariffs.”

Still, the investment platform operator was able to report net new business of £1.7bn in the three months to 30 September, with new client numbers reaching 35,000. Assets under management grew 3% in the quarter to £101.8bn, with modestly rising markets contributing £0.8bn of upwards movement. Net revenue for the period increased by 6% to £128.1m.

Even with the downward pressure of Brexit, that still looks like a pretty decent performance to me. But the impact of current Brexit fears might be nothing compared to the actual effect of the departure itself, if we’re saddled with an economy-crushing no-deal expulsion.

Buy the shares?

But what of Hargreaves Lansdown shares now? Despite having no argument against the quality of the company, which seems well-proven, I’ve always been nervous over the market’s valuation of the stock. I’d expect a premium valuation over the Footsie average, but the P/E multiples in excess of 30 that we’ve been seeing in recent years turns me away.

I see too much past growth in today’s share price, and on that kind of valuation I see very little downside safety margin — especially if we’re in for a few tough economic years.

For me, the shares are just too expensive for a company, albeit a good one, offering me dividend yields of only around 2.5%.

The post The Hargreaves Lansdown share price is hit by Brexit. Here’s what I’d do appeared first on The Motley Fool UK.

Deadly duopoly

That hasn’t hurt the OnTheMarket share price, quite the reverse. Perhaps that’s because the loss is due to the estate agency-backed group’s plan to invest heavily in its business as it looks to wrestle power, revenues and eyeballs from the Rightmove and Zoopla duopoly.

The company’s administrative expenses almost tripled, from £9.7m to £27.8m, as it hired new marketing staff, while advertising expenditure jumped from £2.2m to £14.9m. That’s in line with its growth strategy, and management said the marketing spend was “more efficient than originally envisaged.”

On target

OnTheMarket boasted a solid cash balance of £15.7m on 31 January, up from £3.2m, helped by last summer’s fund raising and a “lower-than-planned cash burn.”

Group revenues climbed to £14.2m, although that’s a rise of just 4.4% over the year. The company has now signed listing agreements with more than 12,500 estate and letting agents. Of these, 5,500 were paying fees at the IPO in February 2018. The remaining 7,000 are on free or discounted rolling one-year deals with the option to pay at expiry. So far, 1,000 have done so. The average spend is £337 a month, but it remains to be seen whether its growth strategy will find long-term traction.

Traffic up

OnTheMarket stock is down 35% over the past year but site traffic is growing, with a record 25.4m visits in May, while also generating healthy leads for estate agent customers. The £70m company only listed in February last year and has a long way to go. Today’s results show promise, but it remains relatively high risk. Rupert Hargreaves would buy it, though.

I would rather play safe and buy one of the big FTSE 100 housebuilders such as Barratt Developments (LSE: BDEV) instead. This sector is also risky as Brexit drags interminably on and concerns grow over demand levels when the Help to Buy scheme is restricted to first-time buyers only from April 2021, a date that’s moving inexorably closer.

Investors in Barratt have shrugged off these worries with the stock recovering 26% in the last six months, although it has dipped lately as Brexit no-deal fears grow. Personally, I reckon you can only worry so much about political events such as Brexit. If you wait until that’s resolved, you wouldn’t buy a UK-focused companies for years.

Rock bottom rates

Help to Buy doesn’t worry me either. There’s a growing number of attractive mortgage deals at 90% and 95% that buyers can turn to when this scheme expires. Property remains in short supply and demand is voracious. Mortgage rates are at all-time lows and the chances of a base rate hike are now vanishingly thin, especially with the Fed looking to cut. All this should prop up the market.

Barratt is valued at a bargain 8.6 times forward earnings, roughly half the FTSE 100 average, and yields a forecast 8% with cover of 1.5. Earnings growth looks steady. People still need homes. Neil Woodford bought it, but don’t let that put you off.

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When prices are rising, it’s straightforward to sell properties, which makes the online estate agent’s business model of a single upfront fee, attractive. However, when prices are falling, and buyers aren’t queuing up to place offers, the service offered by traditional estate agent becomes invaluable. In a falling market, estate agents start to earn their fees.

Never tested 

Purplebricks has never been tested in a falling market, so we don’t know how the company will perform in this environment. But with home prices across the UK starting to slide, we’ll soon find out.

The problem the company now faces is trying to stave off losses in its home market while growing overseas. Purplebricks is trying to break into the US and Australian markets and this expansion incurred losses of more than £30m in the first half of last year.

So far, the UK business has helped to fund these losses with the home division reporting a profit of just over £4m in the first half of last year. Although this wasn’t enough to prevent overall H1 losses doubling.

Meanwhile, City analysts are not predicting any profit for the group for at least the next two years, possibly longer, if sales in the UK start to fall. With so much uncertainty surrounding outlook for the business, I’m a seller not a buyer at current levels.

On the other hand, I think Purplebricks’ peer OnTheMarket (LSE: OTMP) has a much brighter future. 

Fatter profit margins 

There are several critical differences between these two businesses. OnTheMarket is an online property portal and doesn’t get involved with buying and selling properties like Purplebricks. I think this is a much better business model, and one that we know can succeed as proven by Rightmove and Zoopla. 

Traffic to the site is surging, with the number of visits exceeding 23.5m in January, a new monthly record, according to the company. The number of estate agent branches using the site has more than doubled year-on-year. In January, OnTheMarket delivered more than seven times as many phone and email leads than it did at the time of its IPO at the beginning of 2018.

What I really like about the online property portal model is that it requires relatively little capital investment to set up. Once the initial systems are in place, economies of scale are quickly realised. Rightmove, for example, reported an operating profit margin of 73% for 2017 and a return on capital employed — a measure of profit for every £1 invested in the business — of 1,000%.

If OnTheMarket can replicate this success, I think there could be significant gains ahead for shareholders.

The post Why I would sell the Purplebricks share price and buy this competitor instead appeared first on The Motley Fool UK.

People were seeing the shares rising rapidly and, not wanting to miss out, piling in without really understanding the company’s valuation.

That, in turn, was pushing the share price up further, and it can carry on like that for some time. But common sense eventually sets in, the fad passes, and the share price descends towards a rational long-term valuation.

Price slide

Since I voiced my fears that it was happening to Purplebricks, the shares have fallen a further 27%. So how do you avoid jumping on, and falling off, bandwagons? I’d start by ignoring the marketing hype.

I don’t want to see big ad campaigns like the Purplebricks one. I want to see where a company’s profit is going to come from. And I want to have some way of relating the share price to that profit.

Competition

The property business is a very competitive one, and every company in it is getting paid one way or another, through commissions, fees, whatever. And I don’t see the “no commission” angle as a game-changer at all — folks selling their homes are going to weigh up the total costs of the alternatives.

Purplebricks is investing huge sums in an attempt at rapid international expansion, but a lot of investors are increasingly seeing it as too far, too fast, before it’s even come close to profitability in its home market.

While Purplebricks is certainly at the sharp end of the online estate agent business, it’s still tiny compared to the traditional market. And first movers are rarely the ones who reap the big profits.

Young upstart

Newcomer OnTheMarket (LSE: OTMP) has had a fiery start to life as a listed company, with its shares gyrating between 102p and 185p since flotation in June. As I write, we’re looking at a price of 141p, for an overall loss of 5%.

On Tuesday, the AIM-listed property portal announced a new deal with Belvoir Lettings. Belvoir is described as “the UK’s largest property franchise” and is set to list all of its residential sales and rental properties at OnTheMarket.com.

The tie-up will extend to shared marketing too, with Belvoir also set to “actively promote the portal brand with digital and branch-based marketing activity.” I don’t know much about marketing, but that sounds more cost effective to me than paying big money for people to shove their faces in cakes on primetime TV.

Both CEOs were, naturally, saying really nice things about each other’s companies, but I do see it as a pretty good move for both.

Would I buy OnTheMarket shares myself? Right now, no. But that’s simply because there are no profits on the horizon yet.

Profit watch

At the interim stage there was £24.3m in cash on the books, but forecasts suggest a pre-tax loss of £26.4m for this year and next, combined. I think OnTheMarket could do very well, but while there’s a likelihood of more funding being needed, I have no way of working out a fair valuation for the shares. I’m watching.

The post Here’s a property stock I reckon could smash the Purplebricks share price appeared first on The Motley Fool UK.