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It’s true that penny shares are often extra risky than multi-billion market cap companies. Nevertheless, once I noticed that the Watkin Jones (LSE:WJG) share value fell by 32% on Wednesday (21 August), it nonetheless shocked me. The corporate has a market cap of £84m and a share value of 32.5p, so it technically is a penny inventory. Right here’s what occurred.
Spooked shareholders
Earlier than we get to the primary driver behind the transfer, let’s shortly talk about the corporate. Watkin Jones is likely one of the UK’s main residences for hire builders. The principle focus is on the coed lodging and different inexpensive housing sectors.
Provided that income for 2023 was £413.2m, it’s clear that this can be a decent-sized firm with weight behind it. But the sharp fall within the share value yesterday will doubtless depart some traders reeling for a while.
In a buying and selling replace, it commented that “market activity through the summer has been slower than
anticipated”. Consequently, it doesn’t count on any giant transactions to occur over the summer season interval. This implies the agency has revised down expectations for working revenue. One dealer that covers the inventory, Progressive Fairness Analysis, has revised down anticipated adjusted revenue earlier than tax from £11.5m to £7m for the 12 months.
Once we contemplate the extent of the hit this might imply for earnings, the 32% drop does seem to make sense.
Weighing up each side
Wanting ahead, I feel issues are finely balanced. On the one hand, the enterprise flagged up that the dearth of transactions this 12 months will influence leads to 2025. In any case, decrease gross sales now imply that these websites “will not contribute to revenue in future periods until they are forward sold”.
Subsequently, the agency doesn’t count on working revenue for 2025 to be above the 2024 determine. This isn’t an important assertion for traders who’re contemplating shopping for the inventory.
There are some causes for optimism although. Rate of interest cuts ought to make it simpler and extra financially worthwhile for the enterprise to function, provided that the price of funding and taking over new debt will likely be cheaper.
Additional, there’s a continued scarcity of rental and pupil properties, that means there will likely be demand going ahead. It’s not just like the enterprise is specializing in an space within the property market that’s actually saturated.
Higher choices elsewhere
Based mostly on the truth that the inventory is down virtually 5% at this time, it doesn’t appear to be the dip has been purchased by worth traders. It makes me cautious about shopping for, particularly as the volatility with penny shares will be excessive.
With my free money, I really feel there are many higher concepts on the market proper now. I don’t really feel assured sufficient within the case for the Watkin Jones share value to get well shortly. On that foundation, I’m staying away.
