Back in January I explained why I’d been buying penny stock Air Partner. On Thursday last week, this aviation services group received a takeover offer. Assuming the bid is accepted by shareholders, this will give me a 50% profit on this holding in just two months.
Of course, takeover offers are unpredictable. I would never buy a stock purely because I thought it might attract a buyer. Even so, I think there are a number of other attractive penny shares on the London market at the moment. Today I want to look at one company I’m considering as a possible replacement for Air Partner in my portfolio.
A turning point?
Small-cap Creightons (LSE: CRL) makes toiletries and fragrances under its own brands and for customers such as supermarkets. It did well in the pandemic by securing a big government contract to supply hand sanitiser. This helped to boost after-tax profit by 34% to £4.3m last year.
However, this isn’t some fly-by-night company that’s appeared out of nowhere. Creightons has been listed on the London market since 1986. Over the last 10 years, the shares have risen by more than 3,600%, making it a true penny stock success story.
Creighton shares have risen by 28% over the last 12 months, but the stock is now well down from the 134p high seen in September last year. In my view, this retreat represents a reality check — it could take a little time for profits to resume growing after last year’s surge.
I think this could be a buying opportunity, as the stock’s valuation now looks quite affordable to me.
Setback or opportunity?
When a share price goes into reverse it’s always worth showing some caution. Some companies never recapture their lost form.
In this case, one potential cause for concern is that there were some director share sales in October and November last year, when Creightons’ share price was still over £1. I think this suggests that company insiders thought the share price might be at a short-term high.
However, executive chairman William McIlroy still has a 23% stake in Creightons, worth nearly £13m. Managing Director Bernard Johnson owns 8%. I’m confident both men will be motivated to continue the development of this business — and perhaps find a trade buyer before they decide to retire.
Why I’d buy this penny stock now
Creightons share price slide has left the stock trading on around 15 times earnings for the last 12 months. This business doesn’t have any broker coverage. This means there aren’t any broker earnings forecasts for the current year, which ends on 31 March.
However, my reading of the recent half-year results suggests that a fairly stable performance is likely during the remainder of the current financial year. If I’m right, then the stock looks reasonably valued to me for a business that’s historically been quite profitable.
I’d be quite comfortable adding a slice of Creightons to my portfolio today, as a long-term holding.