It’s true that penny shares are normally extra risky than multi-billion market cap companies. Nonetheless, after I noticed that the Watkin Jones (LSE:WJG) share price fell by 32% on Wednesday (21 August), it nonetheless stunned me. The corporate has a market cap of £84m and a share price of 32.5p, so it technically is a penny inventory. Right here’s what occurred.

Spooked shareholders

Earlier than we get to the principle driver behind the transfer, let’s shortly talk about the corporate. Watkin Jones is likely one of the UK’s main residences for lease builders. The primary focus is on the scholar lodging and different reasonably priced housing sectors.

On condition that income for 2023 was £413.2m, it’s clear that it is a decent-sized firm with weight behind it. But the sharp fall within the share price yesterday will possible go away some buyers reeling for a while.

In a buying and selling replace, it commented that “market activity through the summer has been slower than
anticipated”. Consequently, it doesn’t anticipate any giant transactions to occur over the summer season interval. This implies the agency has revised down expectations for working revenue. One dealer that covers the inventory, Progressive Fairness Analysis, has revised down anticipated adjusted revenue earlier than tax from £11.5m to £7m for the 12 months.

After we take into account the extent of the hit this might imply for income, the 32% drop does seem to make sense.

Weighing up either side

Wanting ahead, I feel issues are finely balanced. On the one hand, the enterprise flagged up that the shortage of transactions this 12 months will influence ends in 2025. In any case, decrease gross sales now imply that these websites “will not contribute to revenue in future periods until they are forward sold”.

Subsequently, the agency doesn’t anticipate working revenue for 2025 to be above the 2024 determine. This isn’t an amazing assertion for buyers who’re contemplating shopping for the inventory.

There are some causes for optimism although. Rate of interest cuts ought to make it simpler and extra financially worthwhile for the enterprise to function, provided that the price of funding and taking over new debt might be cheaper.

Additional, there’s a continued scarcity of rental and scholar properties, that means there might be demand going ahead. It’s not just like the enterprise is specializing in an space within the property market that’s actually saturated.

Higher choices elsewhere

Based mostly on the truth that the inventory is down nearly 5% right now, it doesn’t appear to be the dip has been purchased by worth buyers. It makes me cautious about shopping for, particularly because the volatility with penny shares could be excessive.

With my free money, I really feel there are many higher concepts on the market proper now. I don’t really feel assured sufficient within the case for the Watkin Jones share price to get better shortly. On that foundation, I’m staying away.