The land of penny stocks is fraught with risk, especially today, where access to capital is becoming even more restricted. Most businesses in this arena have small operations with miniscule profits and lack the necessary resources necessary to scale rapidly.
Yet, every once in a while, one of these companies finds a way. And suddenly a teeny-tiny business can become a giant. I may have found such an opportunity today. Its shares collapsed during the pandemic, but they could be in for an impressive comeback.
A turnaround penny stock?
Investing in an equipment hire business is hardly the most exciting idea out there. Yet HSS Hire (LSE:HSS) might soon display an explosive performance for patient investors.
As a reminder, this company lends out tools & equipment while also providing support services to over 32,000 customers in the UK. It predominantly caters to construction tradespeople, who don’t necessarily have the capital to buy expensive machinery. And for those that do, many still choose to rent to avoid all the costs of testing, maintenance, and distribution.
In 2020, the pandemic struck. Multiple lockdowns saw construction projects grind to a halt, and the demand for equipment rental evaporated with it. Unsurprisingly, the group’s revenue saw a double-digit decline, and profitability went out the window with a reported £4.7m operating loss. Subsequently, the penny stock went from trading at 26.7p to 14.3p today.
Back to black
But is all that about to change? Earlier this year, management released its preliminary results for 2021. And despite the share price staying in penny stock territory, things seem to be going very well, in my opinion.
Revenue across the board jumped by double digits, climbing back to 92% of pre-pandemic levels. According to a recent trading update, this top-line growth has continued over the last six months. But the bottom line is where the real magic is happening.
Following the disruptions from Covid-19, management executed a major structural overhaul of the business. Some 134 stores were permanently shuttered, revamping the operating model to rely more heavily on technological solutions. I think it’s fair to say the plan worked. Why? Because the Return on Capital Employed (ROCE) surged from 10.7% to 22.1%. Consequently, operating profits for 2021 came in at a record high of £34.5m!
Time to buy?
HSS Hire’s performance is undoubtedly impressive. But I do have some reservations about this still-penny stock. The rental equipment sector doesn’t exactly have high barriers to entry. And, unfortunately, that means the group’s rental fees are constantly under competitive pressure.
It’s also worth noting that the firm has just under £79m of debt maturing in the next five years. This is a drastic reduction from the £240m due just a year ago. However, with interest rates rising, these financial obligations could eat away at its newfound profitability.
Nevertheless, with a market capitalisation of only £100m, I can’t help but feel this opportunity is too good to miss for my portfolio.