Our Red Hot Penny Share Small Cap Stock Watchlist

The announcement of the GNU and the potential it has to revive SA gave us a little teaser on what we can expect in terms of SA stocks. The cabinet appointments have been announced and while plenty of risks and challenges lie ahead, we believe a united GNU and pro-growth economic policies could ignite a major rally in SA stocks… especially SA-focussed small cap stocks.

Just consider in the space of two days, the JSE Small Cap Index hit new highs on optimism of a GNU. So with that in mind, here at Red Hot Penny Shares we believe these are the top three penny stocks we’re watching as we watch the GNU growth reform plans play out.

Small cap to Watch #1: Primeserv (JSE: PMV)

Listed in 1998, Primeserv (JSEL PMV) provides support services such as staffing and training to every industry across South Africa.

This includes permanent and temporary recruitment, outsourcing, payroll services, and much more.

In addition, Primeserv offers a comprehensive portfolio of fully accredited qualifications, skills programmes, learnerships and apprenticeships that covers a wide range of expertise.

For example, for the construction industry, Primeserv offers qualification in bricklaying, carpentry, plumbing, painting and décor, plastering and much more.

For the occupation health sector, Primeserv offers qualifications in first aid and firefighting.

So most of Primeserv businesses rely on job creation and economic growth.

Even so, Primeserv has astutely weathered SA’s “no growth economy” over the past few years,

Its profits were hit during the pandemic with headline EPS coming in at 13.77cps back in 2021. Since then, earnings have soared a whopping 137% to 32.68cps in 2024.

It’s also been a consistent dividend payer with pay-outs increasing every year since 2020. In fact, dividends have grown 266%.

And Primeserv has bolstered shareholder value with buybacks totalling R14 million over the past five years.

As a result, its shares are up +200%. So where is the opportunity…?

Well, the company’s shares are still DIRT CHEAP – trading at a 34% discount to its net asset value per share. Going forward, if there’s GNU agreement and more importantly, the implementation of pro-growth reforms that could boost job growth, then this stock will soar.

Small cap to Watch #2: Finbond (JSE: FGL)

Started in 2002, Finbond is a leading South African Financial Services institution that operates as a mutual bank. The company listed on the JSE in 2007 and received its Mutual Banking license from the South African Reserve Bank in 2012.

Today, Finbond conducts its business through two divisions focused on:
• Investment and Savings Products
• Micro Credit and Insurance Products

In investments and savings, the Finbond strategy is to offer clients superior products that typically boast better savings interest rates. In addition, these savings account products are some of the most affordable accounts in South Africa, at R7.50 per month for the FinSave Value, FinSave Lite and FinSave Blue accounts.

This strategy is a great way to gain market share in the lower income markets, which the major banks often ignore.

As of 28 February 2024, Finbond’s total deposits from clients sit at R590 million.

Finbond has also tapped into the lower income market by offering micro credit products that cater to the under-banked. And it’s been successful. Over the past year, Finbond’s collected R1.54 billion cash from microfinance customers.

All in all, Finbond had 29,351 active and consistently funded transactional banking accounts at the end of the 2024 financial year.

And this has helped improve its profitability.

For 2024, profits after tax DOUBLED, while total income increased by 17.8% to R546.4 million.

This helped headline EPS recover by +97% from a loss of 19.1cps to a loss of 0.4cps.
With the company turnaround plan in full swing, I expect a positive earnings result in 2025. And the implementation of the GNU could spur even bigger growth.

More jobs equal more disposable income for South Africans. Ultimately, this could encourage more deposits and savings by clients.

Finbond shares are up over 72% in 2024 so far. Yet, it still trades at a 62% discount to its net asset value per share. For now, I’m keeping an eye on Finbond’s next results, so I can see if the recovery was once-off or legitimate.

Small cap to Watch #3: Cilo Cybin Holdings (JSE: CCC)

Established in 2018, Cilo Cybin Holdings recently listed on the JSE as a special purpose acquisition company (SPAC).

SPACs are typically dubbed “blank cheque” companies. They list on stock exchanges with no commercial operations or assets.

Instead, they raise a bunch of capital and then, use that capital for listing requirements and for viable acquisitions or takeover targets in their respective industry.

So, what does the company do?

Cilo Cybin supplies medical cannabis products such cannabis flowers, THC and CBD oils, cannabis-infused vapes and more.

They also own a state-of-the-art indoor cultivation facility. Here, they can dry, trim and further process licensed cannabis products such as oils, tinctures, topicals creams, and isolates. Furthermore, they can also execute 3rd party manufacturing for the international cannabis industry.

In addition to processing cannabis, this facility also produces and packages final, labelled products ready for consumer markets.

While, the business is located in South Africa, the Cilo Cybin strategy is geared towards exports of medicinal cannabis to other markets outside SA.

In fact, its certified cannabis products are accepted by the relevant international regulatory authorities in Australia, Japan and Thailand. And in 2023, the company successfully began exporting Cannabis Active Pharmaceutical Ingredients (API), oils, and flowers to the Australian market.

Other than cannabis, Cilo Cybin will also pursue further licenses to manufacture MDMA, Psilocybin, and LSD products in the future.

Now, that the company’s listing is complete, the first step is acquiring its first target asset – Cilo Cybin Pharmaceutical – and its 2,500 m2 facility in Midrand.

From there, the company plans to graduate to the main JSE board before the end of the year, and then hunt for further growth opportunities in the cannabis market.

For now, however, Cilo Cybin will list with around a R70 million market capitalisation. So, the company’s tiny. This should change as it expands and acquires new businesses.

A big win for the company was the recent signing of the Cannabis for Private Purposes Act by President Cyril Ramaphosa. This law makes SA the first African nation to legalise the use of marijuana.

I’m looking for new growth-driven acquisitions or new client and market deals before I call a buy on this one.

If you’d like to be on the list for when these become a buy, then join our Red Hot Penny Shares community. When you sign up, we’ll also give you a free download of the three small caps we recommend you buy now to get started!