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One food-related penny stock I’ve had my eye on for some time is DP Poland (LSE: DPP). Should I buy some shares?
Pizza purveyor
DP Poland owns the master franchise for Domino’s Pizza in Poland. As a small-cap with a sub-£100m market capitalization, DP’s shares are trading for literal pennies, 10p, to be exact, at present.
Over a 12-month period, the shares are up over 40% from 7p at this time last year, to current levels.
The bull case
The fact DP is targeting, and looks to be succeeding, in an under-penetrated market is appealing. Plus, having the master franchise to one of the biggest pizza brands in the world is a plus point. As well as Poland, the business is venturing into Croatia too. This new avenue could boost earnings as well as potentially returns too.
Next, I’m buoyed by DP’s business model, namely its two main segments. One is its own restaurants, and the other is a sub-franchising model. The latter focuses on selling franchises and it helps set them up, and takes royalties for the pleasure. It seems this modus operandi is working well. Since opening its first store in Warsaw in 2011, it now possesses 116 stores in Poland, and four in Croatia. The business has ambitious plans to have 500 stores by 2030.
It has to be noted that the business is loss-making. This may be a red flag, but many small caps are loss-making for a number of years to start with. The good sign for me with DP is that the losses seem to be shrinking each reporting period.
Another positive for me is the fact that the business is improving gross profit margins. It has done this for the past three years in a row. If it can continue in this manner, I reckon it could be in the black very soon. However, I do understand the past is not a guarantee of the future.
Risks and my verdict
Firstly, Poland has been battling high inflation for some time. In fact, it has previously had one of the highest inflation rates in Europe just two years ago. This makes the firm’s gross profit margin increase even more impressive, if you ask me. However, the longer-term worry is that continued inflation could mean higher costs, tighter margins, and the possibility of a profit being further away.
Next, the business does have some debt to contend with on its balance sheet. This is not usually a worry as most businesses have some form of debt. However, DP recently raised funds through shareholders to pay down debt and also fund growth. As a small cap, it doesn’t have the financial might to stave off financial issues. Higher debt levels and a lack of cash flow in the future could be fatal.
Overall, at 10p per share, and a decent growth record to date, I’d be willing to buy a small number of shares when I next can. I reckon DP could be a shrewd addition to my holdings for future returns and growth.
