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I’m currently searching for penny stocks that could turbocharge my portfolio returns. Although small-cap shares often have a higher volatility risk than more established companies, with enough spare cash I’d like to allocate a modest percentage of my portfolio to higher growth opportunities.
One AIM-listed share that has attracted my attention recently is Accrol Group Holdings (LSE: ACRL). This firm manufactures toilet rolls, kitchen towels, and facial tissue products for major grocery retailers, such as Tesco and Aldi. As I write, the Accrol share price is below 32p.
Granted, it’s hardly the most exciting sector to invest in. But, I think the potential profits on offer make this penny stock a more enticing investment prospect than it might first appear. Here’s why.
The Lancashire-based company’s most recent financial results for half year 2022/23 show tremendous promise.
Accrol’s revenue grew by 64% to hit £121.1m, which translates into a 19% uplift in its gross profit to £21.7m. In addition, the company’s also making progress in terms of claiming market share. In 2017, the firm occupied 5.6% of the UK tissue market. Today, that figure has ballooned to 21.5%.
In the medium-term, the group has ambitions to build a sustainable paper mill which improves the outlook for the company’s efficiency and routes to market.
What’s more, the business has also signalled the possibility of adding value for shareholders in the form of dividends or share buybacks. The possibility of generating passive income from buying Accrol shares boosts the penny stock’s investment appeal in my view.
Despite excellent headline figures, there are some causes for concern in Accrol’s latest results. First, an 18% gross margin represents a 6.7% year-on-year fall. This suggests the company has made slow progress in turning higher gross profits into net earnings.
Second, the group’s net debt levels increased by 41% compared to the previous half year. At £30.5m today, the debt burden is a little high for my liking. However, the company did face challenges from supply chain disruption and strikes at UK ports. These risks remain, but there’s a good chance trading conditions could begin to normalise as the year progresses.
Third, the inflationary environment continues to act as a headwind. Rising input costs make for a difficult market environment. If high inflation persists, this would likely limit the company’s growth prospects. Equally, if inflation falls substantially, the outlook for Accrol shares should improve.
Should I buy this penny stock?
If I had some spare cash, I’d invest in Accrol shares today. Overall, I believe the company has promising growth prospects and its success in capturing significant market share over a short period is particularly impressive.
The group expects its gross margins will improve this year as the time lag impact on price increases filters its way through into the firm’s results. If it achieves this goal, the case for investing in the company would become even more compelling in my view.
When the time comes to rebalance my portfolio, Accrol shares will be right at the top of my shopping list of penny stocks to buy.
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