A penny stock for the homeworking boom

Fresh Covid-19 restrictions in Britain could potentially provide a boost to software firms like 1Spatial (LSE: SPA). New ‘Plan B’ rules have put homeworking firmly back on the agenda, meaning companies will have to keep spending to keep their workers connected. This bodes well for 1Spatial because it provides location master data management (or LMDM) software that allows users to connect and to share data from multiple sources in different locations.

Latest financials showed 1Spatial’s revenues rise 8% in the six months to July as the steady migration from office working to remote working continued. I think this penny stock’s a great way for me to make money from this theme in spite of the company’s elevated valuation. Today 1Spatial trades on a forward price-to-earnings (P/E) ratio of 68 times at current prices of 50p. Eye-popping multiples are extremely common among tech shares that have high growth prospects. But they also mean share price collapses can happen if news flow begins to worsen even marginally.

Full steam ahead

The prospect of new Covid-19 lockdowns also bodes well for UK hobby shares like Hornby (LSE: HRN). Sales at the models mammoth rocketed in 2020 as housebound Brits sought to entertain themselves. They’ve kept rising since then, too, even as restrictions have been scaled back. Revenues rose 3% in the six months to September.

I wouldn’t just buy Hornby because of the near-term profits boost it could receive from the pandemic. Its packed stable of products like Airfix model kits, Corgi miniature cars, and own-branded train sets are considered market leaders. The have a timeless appeal that allows the business to raise prices even when broader retail conditions are tough. I think this immense brand power makes them a top buy even though supply chain pressures are hitting sales right now. Hornby shares can be picked up at 40p apiece.

Cleaning up nicely

I believe Photo-Me International’s (LSE: PHTM) expansion into other rapidly growing self-service markets could help to turbocharge profits growth. The penny stock is perhaps best known for its photo booths and laundry services but it also operates amusement machines, digital photo printing points, and food vending machines. It has a broad geographic footprint, too, giving it extra strength through diversification as well as exposure to fast-growing emerging markets. Its roughly 45,000 machines are spread across 17 countries all over the globe.

Sales at Photo-Me could suffer if broader economic conditions worsen. Its machines are located in shopping malls, travel hubs, and supermarkets, places where footfall could drop if consumer spending comes under pressure. However, I believe the penny stock’s low valuation reflects this ever-present risk. At 58p per share Photo-Me trades on a forward P/E ratio of just 7.7 times.

Expensive but excellent

Okay, let’s get the bad stuff out of the way first. While I like tech share 1Spatial (LSE: SPA) a lot, its shares don’t come cheap. In fact, an elevated forward price-to-earnings (P/E) ratio of 58 times is the sort of valuation that could cause a share price to come crashing down if news flow suddenly deteriorates.

However, I think it could be argued that this penny stock is worthy of such a premium. Why? Well, put simply, its technology allows IT users to share and combine data from many sources in different places. This puts it in great shape to ride the growth of remote working following the Covid-19 crisis.  In fact, the company’s latest financials last month showed order levels continue to grow at an encouraging rate.

A dirt-cheap penny stock

A strong construction sector bodes well for the profits outlook at Topps Tiles (LSE: TPT) too. This penny stock sells to both the public and trade customers, meaning it’s riding the surge in home improvement projects and the strong housing market to excellent effect. Like-for-like sales on a two-year basis soared 12.9% in the 13 weeks to 26 June, latest financials showed.

Topps Tiles could see sales slump again if the Covid-19 crisis worsens. Not only could the company have to shutter its stores again, but a fresh hit to the economy could damage demand for its products too.

But I believe these threats are baked in at current prices. City analysts think annual earnings here will rise almost 260% in the current financial year to September. This leaves the company trading on a forward price-to-earnings growth (PEG) readout below 0.1.

Oh, and right now, the Topps Tiles share price carries a meaty 4.2% dividend yield. This is superior to the 3.5% forward average for UK shares.

Another bargain UK share

Speedy Hire (LSE: SDY) shares some of the same qualities as Topps Tiles. For example, demand for its rental equipment is rising strongly, thanks to the strength of the British construction industry. The penny stock saw hire revenues in the UK and Ireland slump 11% in the last fiscal year (to March). But revenues climbed 4% in the final three months as trading conditions improved.

Speedy Hire is also a penny stock that offers plenty of bang for your buck. City brokers think annual earnings will rise 38% here in fiscal 2022, resulting in a forward PEG of just 0.4. Any reading below 1 suggests a stock could be undervalued.

On the negative side, Speedy Hire could see sales take a tumble if Covid-19 cases rise to the point at which construction sites are closed and social distancing comes back with a vengeance. Still, at current prices, I still think this is a great-value penny stock to buy.

A good buy despite rising online competition

Profits at Card Factory (LSE: CARD) took an almighty whack in 2020 as Covid-19 forced its stores to close. But soaring vaccination rates in Britain mean that things are starting to look up for this UK retail share. Card Factory is in great shape to ride the growth of value retail as it sells its greeting cards, balloons and other celebration-related paraphernalia at rock-bottom prices. I also like its robust position in a defensive retail market. The giving and receiving of greetings messages remains stable during economic upturns and downturns, right?

Card Factory has also been investing in its online channel to ride the e-commerce explosion. Though it’s important to remember that internet-only operators like Moonpig are grabbing an increasingly-large slice of the cards market in Britain.  

An expensive but excellent penny stock?

I’d also happily buy 1Spatial (LSE: SPA) shares as the digital revolution clicks through the gears. This UK IT services share provides Location Master Data Management (or LMDM) software, products which allow users to connect or combine data from multiple sources in different places. And it is doing a roaring trade at the moment. 1Spatial advised this week that it has “entered the new year with increased levels of committed revenue and a strengthened financial position.”

Orders are up year-on-year in the financial year to January 2022, and 1Spatial’s sales pipeline is growing across all regions. Bear in mind that investor expectations of explosive profits growth leave the company trading on a forward price-to-earnings (P/E) ratio of around 60 times. This sort of elevated reading could prompt a share price collapse if news flow out the company begins to worsen.

A UK property share

I think that Empiric Student Property (LSE: ESP) is another top penny stock to buy this July. As the name suggests, it provides accommodation for students. And it’s in great shape to ride the boom in university admissions in Britain. Bella Malins, director of admissions at University College London, recently told The Guardian that undergraduate admissions to the university were up 16% this year. This is one of many such spikes being recorded across the country.

I wouldn’t just buy Empiric Student Property for short-term gains though. British universities have been an attraction for foreign students for centuries. And recent data suggests that their appeal among overseas students is still strong, a particularly good omen for accommodation providers like this.

It’s important to remember that Empiric is nowhere near as busy on the acquisition front than rivals such as Unite Group. This could compromise the company’s ability to deliver long-term earnings growth.

1Spatial is winning contracts

The company has reached a £51m market cap as a series of deals led its share price to rocket in recent weeks.

There’s its collaboration with Esri UK, for which it signed a multi-year £1m contract with Northern Gas Networks. This is to help migrate the gas network to Esri’s novel ArcGIS utility network model. 1Spatial expects recurring revenue to be over £200k for this deal.

It will contribute by ensuring the quality of the data is fit and ready to migrate. This contract opens a door into the utilities sector that desperately needs updating to compete in a ‘smart’ world.

On 1 April, 1Spatial announced it’s also won a multi-year contract in collaboration with Version 1. This is to help the UK Department for Environment, Food and Rural Affairs (Defra) manage its land and verify subsidy claims made by farmers. It’s a five-year contract worth around £0.9m.

Major opportunity

1Spatial is a domestic and internationally-focused business with a variety of clients. Notably these include a lot of UK names like Ordnance Survey, Network Rail, and the Energy Networks Association. While there’s many more in the US.

Its software ensures the detailed digital maps used by these organisations are accurate and clear.

A lot of international infrastructure needs repairing and updating, especially as governments advance towards a 5G interconnected world. That’s an opportunity for 1Spatial as its platform allows organisations to map all their assets above and below ground. This means collating a database of pipes, cables, tunnels and all the intricacies of old and new infrastructure. Over time, this should build a comprehensive picture of where everything is. And in doing so, it could save a fortune in preventing accidental damage to properties and landscapes. For example, when a digger driver laying a foundation accidentally bursts a gas line.

Surprisingly, 1Spatial’s kit is also used by Alphabet‘s Google (the king of digital maps) to view and manage its offices and help plan efficient use of electricity. Furthermore, at government level, the platform is useful in disaster prevention planning. For instance, accurately mapping areas deemed high risk for fire or flood will ensure emergency services can respond quickly.

Room for growth

This company appears to have a lot of scope for growth in the years ahead. Especially as the UK government has made it clear, it wants to encourage investment in UK tech companies.

This is all very well, but there are downsides. My primary concern is that the share price has risen quickly. Could that mean investors have already priced in growth potential? Future business success depends on its ability to renew and win contracts. Losing a big contract would mean a hit to its income. And being an AIM-listed share means it’s likely to be subject to share price volatility. Foreign exchange rate fluctuations could affect its revenues, or rivals could swoop in and offer a superior product.

Nevertheless, I think this company looks to have growth potential ahead. Above all, with Big Data tech stocks in demand, I’d buy shares in 1Spatial today.