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One food-related penny that I’ve had my eye on for a while is this DP Poland (LSE: DPP). Should I buy some shares?
Pizza delivery guy
DP Poland is the owner of the master franchise for Pizza from Pizzeria Domino`s in Poland. As a miniature cap company with a market capitalization of less than £100m, DP shares are currently trading for literally pennies, 10p to be precise.
The stock has risen more than 40% in 12 months, from 7p this time last year to its current level.
The bull case
The fact that DP focuses on an underpenetrated market and appears to be successful is attractive. It’s a plus to own a master franchise for one of the largest pizza brands in the world. In addition to Poland, the company also ventures into Croatia. This fresh path could enhance profits and potentially returns.
Next, I am hopeful about DP’s business model, namely its two main segments. One is its own restaurants, the other is a sub-franchise model. The latter focuses on selling franchises, helps set them up and collects royalties for the pleasure. This course of action seems to be working well. Since opening its first store in Warsaw in 2011, it currently has 116 stores in Poland and four in Croatia. The company has ambitious plans to have 500 stores by 2030.
It is worth noting that this activity generates losses. This may be a warning sign, but many small-cap stocks start out losing money for many years. To me, a good sign for DP is that losses seem to be decreasing with each reporting period.
Another positive for me is that the company is improving its gross profit margins. It has done this for the last three years in a row. If this continues, I think it could break even soon. However, I understand that the past is not a guarantee of the future.
Risk and my verdict
Firstly, Poland has been struggling with high inflation for some time. In fact, just two years ago, the country already had one of the highest inflation rates in Europe. This makes the company’s gross profit margin growth even more impressive, if you ask me. However, the long-term concern is that persistent inflation could mean higher costs, tighter margins and the potential for profit to slip away.
Next, the company actually has some debt on its balance sheet. This is not usually a concern because most businesses have some form of debt. However, DP recently raised funds through shareholders to repay debt as well as fund growth. As a small-cap company, it doesn’t have enough financial strength to prevent financial problems. Higher debt levels and a lack of cash flow in the future can have disastrous consequences.
Overall, at 10p a share and decent growth so far, I’d be willing to buy a miniature number of shares when I can. I believe DP can be a astute addition to my assets for future returns and growth.