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One food-related penny inventory I’ve had my eye on for a while is DP Poland (LSE: DPP). Ought to I purchase some shares?
Pizza purveyor
DP Poland owns the grasp franchise for Domino’s Pizza in Poland. As a small-cap with a sub-£100m market capitalization, DP’s shares are buying and selling for literal pennies, 10p, to be actual, at current.
Over a 12-month interval, the shares are up over 40% from 7p at the moment final yr, to present ranges.
The bull case
The actual fact DP is focusing on, and appears to be succeeding, in an under-penetrated market is interesting. Plus, having the grasp franchise to one of many greatest pizza manufacturers on this planet is a plus level. In addition to Poland, the enterprise is venturing into Croatia too. This new avenue might enhance earnings in addition to probably returns too.
Subsequent, I’m buoyed by DP’s enterprise mannequin, specifically its two most important segments. One is its personal eating places, and the opposite is a sub-franchising mannequin. The latter focuses on promoting franchises and it helps set them up, and takes royalties for the pleasure. It appears this modus operandi is working effectively. Since opening its first retailer in Warsaw in 2011, it now possesses 116 shops in Poland, and 4 in Croatia. The enterprise has bold plans to have 500 shops by 2030.
It must be famous that the enterprise is loss-making. This can be a crimson flag, however many small caps are loss-making for numerous years to begin with. The nice signal for me with DP is that the losses appear to be shrinking every reporting interval.
One other constructive for me is the truth that the enterprise is enhancing gross revenue margins. It has carried out this for the previous three years in a row. If it could possibly proceed on this method, I reckon it may very well be within the black very quickly. Nonetheless, I do perceive the previous will not be a assure of the longer term.
Dangers and my verdict
Firstly, Poland has been battling excessive inflation for a while. In truth, it has beforehand had one of many highest inflation charges in Europe simply two years in the past. This makes the agency’s gross revenue margin improve much more spectacular, in the event you ask me. Nonetheless, the longer-term fear is that continued inflation might imply larger prices, tighter margins, and the potential of a revenue being additional away.
Subsequent, the enterprise does have some debt to take care of on its stability sheet. This isn’t often a fear as most companies have some type of debt. Nonetheless, DP lately raised funds by way of shareholders to pay down debt and in addition fund development. As a small cap, it doesn’t have the monetary may to stave off monetary points. Greater debt ranges and a scarcity of money circulate sooner or later may very well be deadly.
General, at 10p per share, and a good development file thus far, I’d be prepared to purchase a small variety of shares once I subsequent can. I reckon DP may very well be a shrewd addition to my holdings for future returns and development.
