Most penny shares have a poor financial outlook. However, there are gems, including this pair of small caps that were in penny stock territory this time last year. Both are doing incredibly well lately as the market starts to reward their financial progress.
I reckon they’re worthy of attention for stock-pickers looking to add smaller growth companies to their ISA portfolios. Here’s why.
Renold
First up is Renold (LSE: RNO). The stock has more than doubled over the past year and is now priced at 59p, giving the firm a market cap of £134m.
Renold is a global supplier of industrial chains and power transmission products. Its chains are known for their reliability and are used in industries such as manufacturing, mining, and agriculture.
The company has also made bespoke chains for the Great Britain Cycling Team’s track cyclists since 2011 — a period of great success. Beyond chains, it manufactures gearboxes and couplings.
Results for the year ended 31 March 2024 were “materially ahead” of previous expectations (the full-year report is due on 17 July). Revenue was expected to increase just 0.9% year on year to £241.5m (at constant exchange rates), but adjusted operating profits were approximately 20% higher.
The group said its productivity and efficiency programmes were driving sustainable profit margin improvement. And at £83.6m, the order book was at near-record levels.
Meanwhile, it has made over 100 bespoke chains for the British Olympic and Paralympic teams in Paris this summer. And it recently won a contract from the Royal Canadian Navy worth £10.6m.
Now, one issue is that Renold has some debt on its balance sheet following acquisitions, which adds risk. But I’m encouraged to see that its net debt position had been reduced by £4.9m to £24.9m at the end of March.
Overall, this small-cap stock is worth considering, in my opinion. The forward price-to-earnings (P/E) ratio is just 8.8. That’s really low for a firm with great momentum and whose profit margins are expanding.
hVIVO
Next up we have hVIVO (LSE: HVO), which I hold shares in. At 28p, the stock is up around 84% over the past year, giving a market cap of £190m.
The company specialises in human challenge clinical trials. These are where healthy volunteers are exposed to pathogens (like viruses) in a controlled environment to test vaccine efficacy. It recruits these volunteers through its dedicated FluCamp service.
Running these trials is a lucrative little niche, as we can see by the firm’s 35% compound annual growth rate in revenue between 2018 and 2023. Net profit last year was £16.1m on revenue of £56m.
It has also just moved into a new, state-of-the-art facility in Canary Wharf. This houses the world’s largest human challenge trial unit and is expected to help hVIVO grow its annual revenue to £100m by 2028.
One risk here is that the company doesn’t have a long track record of profitability. A return to losses would hurt the stock quite badly, I fear.
Still, the firm remains confident in its prospects and has even started paying a dividend. And it’s just won its largest field study contract to date (for a phase 2b influenza drug candidate).
The future looks very bright. I’m considering buying more shares.
This post was originally published on Motley Fool
