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Every stock has good years and bad years. But share price swings can be extreme. When I spotted a penny share that had been flying high during the pandemic and then fell sharply in the following years, it caught my eye. Could it now be at a price that makes sense to consider buying?
The contender
I’m talking about BATM Advanced Communications (LSE:BVC). It’s a somewhat unusual tech group, combining network infrastructure and cybersecurity with a medical diagnostics business.
It splits up operations into three main areas. These are network, cyber tech, and medical diagnostics. In recent years, it has also sold some non-core businesses to sharpen its focus on these three high-growth areas. In terms of actually making money, it generates revenue from a mix of software licenses and services, right through to selling medical equipment.
The rise and fall
The share price surged around 300% in the space of just a few months back at the beginning of the pandemic in 2020. The main reason for this was from the medical division, which produced Covid-19 test kits. That drove huge demand, boosting revenues and margins.
With hindsight, it’s easy to say this wasn’t sustainable. As Covid-19 waves subsided, demand for mass testing dropped. This negatively impacted the business’s revenue. More than this, investors had quickly become over-reliant on one-off pandemic revenue. Even though the other arms of the company were operating, they suddenly became a much smaller contributor overall.
After the crash, BATM tried to pivot back to its core business, which is where it’s currently at.
Looking to the future
The most recent H1 results showed good momentum on all fronts. It posted an adjusted profit before tax of $1.6m. Although this was a drop from the $3m of the previous year, it’s still a profitable company. Within the cyber division, a “significant milestone (was) achieved with the delivery of the first units of a customised version of the Group’s encryption platform”. This could yield a significant financial boost going forward if demand is strong.
Given the continued shedding of underperforming operations, I think the company is well-positioned to grow in the coming year. However, I struggle to see the penny stock ever getting back to levels above 100p. The pandemic surge was a one-off event that I don’t think will be repeated in our lifetimes. Therefore, it’s not a realistic share price target.
It’s hard to say whether the stock is undervalued, with the 14% rally over the past year making it fairly valued in my view, given the outlook.
I think this is a good example of a penny stock investors should be cautious about. Just because it had a good run in 2020 doesn’t mean it will reach the same price in the future. What created that rally was a unique situation. On that basis, I think there are better shares out there for growth potential.
