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It’s true that penny shares are normally extra unstable than multi-billion market cap corporations. Nevertheless, once I noticed that the Watkin Jones (LSE:WJG) share worth fell by 32% on Wednesday (21 August), it nonetheless stunned me. The corporate has a market cap of £84m and a share worth of 32.5p, so it technically is a penny inventory. Right here’s what occurred.
Spooked shareholders
Earlier than we get to the principle driver behind the transfer, let’s shortly talk about the corporate. Watkin Jones is among the UK’s main residences for hire builders. The principle focus is on the scholar lodging and different reasonably priced housing sectors.
On condition 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 worth yesterday will possible go away some traders reeling for a while.
In a buying and selling replace, it commented that “market exercise via the summer season has been slower than
anticipated”. Consequently, it doesn’t anticipate any massive 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 yr.
Once we take into account the extent of the hit this might imply for income, the 32% drop does seem to make sense.
Weighing up either side
Wanting ahead, I feel issues are finely balanced. On the one hand, the enterprise flagged up that the dearth of transactions this yr will influence ends in 2025. In spite of everything, decrease gross sales now imply that these websites “is not going to contribute to income in future intervals till they’re ahead offered”.
Subsequently, the agency doesn’t anticipate working revenue for 2025 to be above the 2024 determine. This isn’t an excellent 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, on condition that the price of funding and taking over new debt might be cheaper.
Additional, there’s a continued scarcity of rental and scholar properties, which means there might 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 nearly 5% at this time, it doesn’t seem like the dip has been purchased by worth traders. It makes me cautious about shopping for, particularly because the volatility with penny shares could 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 worth to get well shortly. On that foundation, I’m staying away.
