Cineworld: a FTSE 250 stock that could explode soon

The Cineworld share price has lost much of the value it had regained earlier in the year. It is at almost half the levels it was at in May at around 65p. But that could change soon. In another article I wrote about it today, I talk about how 2022 could be the year for the Cineworld share price. 

The pandemic is on the wane, stock markets are on fire and at the macro level, the entertainment sector is growing at a fast clip. All of this points exactly in one direction to me, and that is a possible share price explosion for the stock. Of course all these trends are still developing, so a lot can still go wrong. But I believe things will go right, which is why I have bought it.

Mitie Group: the penny stock is set to make profits 

FTSE 250 facilities management stock Mitie Group has already shown plenty of promise. Its share price has more than doubled over the past year. It remains a penny stock for now though, with a value of around 70p. 

It had fallen into losses in the recent past, which is a bit of a downer. But guidance for 2022 is positive, as it expects to make a profit. The company’s cleaning services have been in demand through the pandemic, and could well remain so as we move into the next year as well. Its other businesses like engineering and catering could pick up too now, as business around the world is getting back to usual. 

UK Commercial Property Investment Trust: property play

Another FTSE 250 penny stock I like is the UK Commercial Property Investment Trust (UKCM), which trades at around 77p right now. The stock had a price of sub-100p even before the pandemic started. And it has regained much of the value it lost in last year’s crash. But it still has some way to go. In fact, I think that in 2022, it may just lose its penny stock status. 

After taking a hit to profits in 2020, it reported a healthy earnings increase for the first half of this year. Moreover, the outlook for UK’s commercial property sector is getting better, as I pointed out in the context of another real estate investment trust (REIT) Hammerson a few days ago. 

What I’d buy

While all of them are great stocks, I cannot buy each and every stock at the same time. I have already bought Cineworld, so I will continue to hold it. The prospects for Mitie Group as well as for UKCM look good, but I am more inclined to buy the former right now. As far as REITs go, I am actually interested in buying FTSE 100 stock Segro right now, otherwise, UKCM would have been on my list too.  

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Card Factory posts improved numbers

If it continues to recover at this rate, it will soon cease to be a penny stock. And it may just show good recovery, going by its latest update. For the six months ending 31 July, the company reported a 16.3% increase in revenue compared to the corresponding period of the previous year. Its operating cash flow also increased from last year and its net debt declined by 33%. 

There are some disappointments to the result too. For instance, its like-for-like (LFL) sales dropped by 3.7%, reflecting the impact of the lockdowns on retailers during the period. Also, it continues to clock losses, indicating that the recovery is far from complete. 

Fall in the penny stock on reduced guidance

Because the pandemic dragged on for far longer than expected, the company has also reduced its long-term revenue guidance. Last July, it had expected to hit revenues of £635m by the end of financial year (FY) 25. It now expects to achieve revenues in excess of £600m by the end of FY26. It is probably because of the reduced guidance that the Card Factory share price has dropped by a huge 6.2% today.

What I’d do

However, I think there is still plenty to be positive about. The next six months’ will reflect the post-lockdown gains. In fact, they have already begun to show compared to the previous results. Moreover, the company’s focus on both online and in-store sales should bode well for it. E-commerce is the industry of the future, as the pandemic showed us, so it can hold the company in good stead.

Moreover, it is also expanding into complementary gifts and party markets, which can drive more customers to it as well as higher revenues. It is a buy for me today. 

UK Commercial Property sees improved asset values

Another penny stock I like is the UK Commercial Property Real Estate Investment Trust (LSE: UKCM). It has shown less volatility than Card Factory since early 2020, but it too is still below its pre-pandemic levels. To me, this indicates that there is still some room for it to rise. I say this particularly in the context of its latest update released earlier today. 

For the six months ending 30 June, its net asset value (NAV) rose by 6% compared to a decline of 5.1% during the same time period last year. It also has an occupancy rate of 96% and its rent collection for August is at 92%. 

Would I buy it?

As the economy improves, the prospects for commercial real estate will get better too. There are of course risks in terms of still persisting uncertainty. And the company also expects office rentals to decline over time. But, on the whole, I am positive on the stock. It too is a buy for me, while it is still a penny stock. 

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Due to the pandemic, the commercial property sector has been hammered. But with the easing of lockdown restrictions and the successful vaccine programme in the UK, I reckon things are looking more positive.

Hence, I’m bullish on the prospects for UKCM. Hammerson is another commercial property landlord that I’d buy too. But while Hammerson mostly owns shopping centres, this UK penny stock has a more diversified approach.

The portfolio

UKCM is a £1.3bn commercial property investment trust. What I really like about it is that it has a fairly diversified portfolio. Over 60% is invested in the industrial sector, of which almost 40% is located in the South-East of the UK. Its largest holding is Ventura Park in Radlett, which consists of various industrial units.

The rest of the portfolio is split between offices, retail and other properties located across the country. While the pandemic has taken its toll, having exposure to several sub-sectors of commercial property means that the investment trust is in a good position to weather the coronavirus storm.

I also like that over 60% of the properties have a long lease expiry profile. By this I mean that a large chunk of its tenant contracts are five years or longer in length. This is also appealing because its gives me some kind of assurance that rent should be collected, at least in the foreseeable future.

In fact, the average lease length on the portfolio is 9.2 years. And there’s an occupancy level of 96%. This means that most of its properties have tenants and only a small portion are vacant. Again, I think this is encouraging news.

Performance

UCKM is trading at a significant discount of 12% to its Net Asset Value (NAV). Couple that with the 3% dividend yield this penny stock offers and the shares look like a bargain to me.

The 12-month average discount to its NAV was over 20% and it’s narrowing. And I think the stock could rise further as the UK fully comes out of lockdown and people return to working in their offices.

The commercial property sector is recovering and this should help UKCM. There were concerns that most people would continue to work from home, but I think that going forward most companies will offer flexible working. This means a hybrid model and so there will be a need for offices. A significant portion of the portfolio is industrial, which has held up fairly well but office space accounts for a chunky 15%.

UKCM has some high profile tenants such as Amazon and Ocado, which are likely to continue to pay their rent. Of course, there’s no guarantee of this with all tenants. If one goes bust, then it’s unlikely UKCM will be able to claw back its rental payments. This could impact the dividend as well and thereby the share price. And of course, 2020 wasn’t a great year as the investment trust made a loss.

But I’m optimistic on the prospects for the commercial property sector and UKCM. Hence, I’d buy the UK penny stock.

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First is Coats Group (LSE: COA). Over the past 12 months, Coats shares are up 12% — but down 17% over two years. At 67.5p as I write, they’ve picked up 16% since a low in May. Still, thanks to a weak spell preceding the most recent gains, I still think I’m looking at a buy here.

May’s trading update revealed a 28% jump in quarterly revenue over last year. That’s against the first few months of the pandemic crash though. But more encouragingly, revenue was 3% ahead of 2019. Organic revenue was just 1% ahead, but that still suggests business is getting back to normal. I’m already wondering how long Coats will still qualify as a penny stock.

The big risk is debt, as the company has just completed a refinancing deal. But at 31 April, net debt of $162m was actually down on December’s $181m figure. I’ll be watching the balance sheet, but this is one I might buy.

Outsourcing recovery

Outsourcing specialist Mitie Group (LSE: MTO) crashed very heavily in 2020, losing more than half its value by late March. And the shares had dropped to real penny stock levels of less than 30p by November. But we’ve seen a remarkable comeback since then, with the Mitie share price already back to pre-pandemic levels.

So I’ve missed one of the strongest post-pandemic recoveries in the FTSE 250. But is Mitie still a stock I’d buy now at 69p? I think it is. The year to March brought in higher revenue than 2020, and operating profit fell only a modest 26%, impacted by Covid-19. A £190m rights issue has strengthened the balance sheet, and there’s very little net debt.

Oh, and Mitie snapped up Interserve’s Facilities Management business in November, doing what all good Foolish investors should do — buy assets while they’re cheap. However, there are still plenty of economic risks on the horizon, and the outsourcing sector might need another year to stabilise. But Mitie joins my watchlist.

Real estate penny stock

Am I mad to consider buying a commercial real estate investment trust? It’s UK Commercial Property REIT (LSE: UKCM), and I don’t think I’m mad at all. At 77p, the shares are down a modest 6% since the start of the pandemic crash. That’s after an impressive 2021 recovery that’s helped the price gain 12% in 12 months.

At the end of 2020, the trust’s net asset value stood at £1.1bn. Even after the carnage of last year, that’s still only fractionally down on 2019’s £1.2bn. And over 10 years, the company has “delivered a NAV total return of 85.6% compared to the Association of Investment Companies peer group of 32.4%.“

UKCM also had very low year-end net gearing, of just 6.4%, compared to a sector average of 31%. So I don’t see any liquidity danger, which is something that often weighs on penny stocks.

If we suffer any prolonged commercial property weakness, I think the share price could stagnate for a period. But I’m seeing an attractive long-term dividend investment here.

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Flying high

It recently touched 52-week highs, which is one indication that the performance has been positively impacted by the property market boom. A bunch of short-term developments have come together to prop up property prices. These include the June deadline for the stamp-duty holiday, an increase in UK households’ savings during the lockdown and a traditionally busy summer period. 

But Halifax expects the real estate boom to continue. A booming post-pandemic economy and a change in preferences towards more spacious properties are the reasons given for this. This can bode well for the penny stock in question. The next question is whether its individual profile also supports the trend in real estate. 

Fundamentals for the penny stock

I last wrote about UK Commercial Property Real Estate Investment Trust (REIT) in late April. At that time, it looked positive from a strategic point of view, with customers in the e-commerce sector like Ocado and Amazon. Its rent collection was also at a healthy 84% for the first quarter of 2020. 

A few days later, it updated its financials, which were a mixed bag. Rent collection for 2020 was 83%, marginally below the number for the first quarter as lockdowns continued. 

Its performance was also diminished from the year before. Its earnings per share (EPS) fell based on alternative performance measures, which indicate how the company believes it has performed. Going by statutory measures, it made a loss. So it follows that there was a loss per share in 2020. 

It is also hard to ignore that its performance in terms of net income was sliding downwards even before the pandemic. Also, there is a possibility that some permanent shift towards working from home has reduced the potential for gains from commercial properties. 

Future looks positive

But there are reasons to be positive too. With the lockdown now lifted, I am optimistic about UK Commercial Property REIT’s performance over the rest of 2021. Even if the commercial property market stays weak, it can be protected by the fact that 58% of its portfolio is in the industrial sector. 

The company has already started seeing signs of revival, according to its latest factsheet. In particular, it continues to be positive about retail warehousing. I think this can provide long-term returns for the business. 

My takeaway for the FTSE 250 stock

This is still a penny stock, still trading below pre-pandemic levels. I think that just going by the fact that its share price is still weak when many others have risen substantially, it could become attractive to investors over time. I would certainly consider it as a long-term purchase for my own portfolio. 

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There are a few around, however, and among them there are two I like.

Barely a penny stock

The first is Cineworld (LSE: CINE), whose share price is just shy of 100p. In other words, it barely qualifies as a penny stock, but it is there. The cinema chain’s share price gathered enough momentum by early March to cross 100p. It even managed to stay there till early April.

But it has been trading at sub-100p levels for around a week now. The drop to these levels came around the time that news of Tom Cruise’s “Top Gun: Maverick”, which was expected to be a big summer release but will now be in theatres only by November. 

But going by the stock market rally and the fact that shareholders just approved suspension of Cineworld’s borrowing limits, I think its share price should pick up soon. I would expect it to continue to gain as cinema footfalls increase later in the year and other promising films hit the screens. 

A FTSE 250 stock with a strategy

At a price of 77p, the UK Commercial Property Real Estate Investment Trust (LSE: UKCM) is another FTSE 250 penny stock to consider. Its share price has been pretty volatile in the past year but has hit a groove since early 2021. It has been in a broad upswing since mid-January. 

It has interests in four kinds of commercial properties – industrial, retail, commercial, and leisure. As business reopens, it should recover slowly from what has been a difficult year. 

Its latest results available are for the half-year ending 30 June 2020, which is a bit dated now. This makes its performance difficult to assess for sure. But indicators of performance since are positive. Its rent collection for the first quarter of 2021 was at 84%. The company has benefited from tenants that have been part of growing sectors in 2020 like Ocado and Amazon.

The company also pays a dividend and has a prudent strategy for the rest of 2021. It aims at investing in supermarkets and logistics, which are among the sectors “where the structural drivers of demand are positively impacted by or largely insulated from the ongoing pandemic” as per the company’s release. 

The upshot

Still, like in the case of Cineworld, until it is well and truly back in business we cannot be sure that it can manage sustainable growth. The pandemic’s toll on companies has set them behind significantly and it will be a while before they are back on track. 

On the other hand, there are stocks that have breezed through 2020 and still show promising prospects. This includes miners, healthcare companies, online marketplaces, and others. I would consider these too, before buying these FTSE 250 penny stocks.

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Then there’s the unfavourable tax regime surrounding buy-to-let property, and the sheer inconvenience of having to buy, maintain and operate a tenanted property. Hassle, hassle, hassle – no thanks! And at the end of it all, there’s no guarantee that you’ll actually make any money from buying and letting a property. With interest rates looking like they could be on the cusp of an uptrend, property prices could fall or stagnate, meaning that erosion of the buying power of your capital could wipe out any gains you manage to make from collecting rent.

A dynamic, high-return property portfolio

Instead of all that bother, I’d rather invest in the property companies listed on the London stock exchange, such as LondonMetric Property (LSE: LMP). The company aims to generate “repetitive and growing” income streams by owning properties in tune with “modern shopping habits.” And one of the biggest habits is the shift to digital retailing, which has contributed to the decline in bricks-and-mortar retailing. LondonMetric has responded by shifting from shopping centre and retail outlet ownership to the distribution centres and “long-term income assets” that currently fill the property portfolio.

The directors claim to be “unemotional” about the properties owned by the company and periodically review each investment. If the projected forward returns don’t measure up, the property is sold and the funds reinvested into a better asset. That sounds like a robust investment strategy to me, and it should keep the firm earning the best returns even as the retail environment evolves over time.

The forecast dividend yield runs at 4.5% or so and price-to-tangible book value is around 1.13. I think the valuation is attractive for what looks like such a well-run and dynamic property firm. But I also like the look of UK Commercial Property REIT (LSE: UKCM), which owns “a diversified portfolio of high-quality income-producing UK commercial property” spread across the UK.

Big in industrials

The company has a high weighting in industrial property, which includes logistics distribution. The directors said in the recent half-year report that industrial property was the driver of outperformance in the firm’s financial returns. The strategy chimes with that of LondonMetric Property, so it seems that both firms have migrated to areas of the market that are performing the strongest.

However, UK Commercial Property also has investments in the Office sector, the Retail sector and the Leisure sector, so there is a bit more diversity in the property portfolio. The dividend yield runs close to 4.3% and the shares trade around 0.89 times tangible book value. I think that shares in both of these property companies would sit well in a stocks and shares ISA and could make a good alternative to investing in buy-to-let property.

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