My friend, the man with a million lucky shares

There are many great reasons to invest in penny shares. But as Tom Bulford explains, buying just because they cost pennies isn’t one of them.

Last week in the sensational sunshine, I was taking a stroll along the Thames Path with my good friend Matt. “I’ve just bought shares in 1PM”, he explained. “I bought a million of them. Because I like the idea of owning a million shares, and I might not get a better chance.”

I bristled at this. Surely he should know that the number of shares you can buy is irrelevant. It is merely a function of the number of shares that a company has issued and the share price – both of which can be altered at a stroke.

One million shares might sound like a lot, but since 1PM has issued no fewer than 4,395,618,769 shares, one million represents just 0.02% of the company. And since Matt paid 0.13p per share, his million shares cost him £1,300 which hardly makes him the successor to Victor ‘I liked it so much I bought the company’ Kiam.

I explained all of this to Matt, but he was not impressed. “Oh, I don’t know about that sort of stuff”, he said. “But I still like having a million shares in something. The trouble with you is that you take it all so seriously.”

I bristled some more and we walked on in silence. And now, to make matters worse, Matt has had the last laugh. The share price of 1PM has shot up and Matt has more than doubled his money. Like the errant son who marries an heiress, it seems that it is better to be lucky than smart.

Aid for small businesses

Anyway, back to 1PM (AIM: OPM), which I have mentioned in this column before. Recently 1PM reported its results to the end of May, and they broke all records. Revenue was up 34%, profit before tax rose 78% to £775,000, and earnings per share were up 71% to 0.0178p, with 0.098p of this having been made in the second half of the year.

1PM finances small businesses through leasing arrangements. If you want to open a coffee shop – and plenty do – then 1PM will buy the coffee machine for you, and you can pay for it over five years. In days gone by, you would go to your bank manager for this sort of thing, but today he is far too busy filling in forms for regulators and dreaming up fancy products to have time for trivial matters like lending you money.

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So entrepreneurs who need a little help have to go elsewhere. In the first instance, they will probably contact a broker. The latter will submit an application to a financier like 1PM, which will then run its largely computerised credit checks, and the aspiring borrower will get a yea or nay. Suddenly financiers like 1PM are being flooded with enquiries. The UK economy is picking up, small businesses are being established at an increasing rate, and 1PM is taking on extra staff to cope.

Investors are waking up to this opportunity

To find out more I had a chat with Maria Hampton, 1PM’s chief executive. She told me that the average rate at which 1PM borrows money is 6.5%, but it lends it out at 19%.

You hardly need to be a genius to see that this is a healthy turn, and a profit margin that will cover the occasional default. She also told me that 1PM is considering diversifying into small business lending, a slight variation on leasing contracts that are secured against individual capital items. And she told me that May, the final month of the financial year, had been a record, a sure sign that the business has strong momentum going into 2013/14.

But the really crucial aspect of this story is that 1PM has been able to raise the finance that it needs to support its lending. A turning point was the issue of £1.5m of equity to Henderson Global Investors in June.

Not only did this provide a considerable boost to 1PM’s funds, but it also demonstrated that the major shareholder, Ron Russell, was prepared to see his stake diluted.

With money raised from Henderson and from private funders – 1PM pays 6%-plus for deposits above £50,000 – the company has raised around £6m in the last 16 months.

Investors have finally woken up to the opportunity presented by the banks’ reluctance to lend and are feeding 1PM and others like it with the funds they need to grow.

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