Lens on Two Penny Stocks: Hydrix Limited and Zicom Group

Summary

• Penny stocks are stocks of small companies with low liquidity, limited resources and are considered risky. However, Penny stocks have a rapid possibility to grow ahead and could provide with high returns compared to other stocks.
• Despite the adverse effects of COVID-19 on Hydrix’s Q4 FY20 operating revenue (AU$3.0 million), Hydrix’s strong pipeline of over AU$50 million furnishes for a robust book of business to work in the coming year.
• Of late, Ziocom Group announced an investment in the production of high-quality surgical mask to bridge the critical shortages witnessed globally and generate recurrent revenue to complement the Group’s capital goods business.

From the time COVID-19 pandemic started spreading, stock markets across the globe had been on a roller coaster ride experiencing a turbulent time. However, despite all the challenges, the world is recouping again and seem to be accepting this new normal and somehow managing the losses triggered by the COVID-19 crisis.

On 21 August 2020, the S&P/ASX 200 Index ended the day’s session at 6,111.2, down by 0.14% as compared to previous day’s close. Also, lately, there have been few ASX 200 penny stocks that have garnered attention of the investors.

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Whenever we talk about penny stocks, the first thing that often strikes our mind is the risk associated with them. Penny stocks (trading at low prices) are believed to be risky, as these are stocks of small companies who are still growing, and might have little or no track record, contain low liquidity, and limited resources.

These stocks are usually preferred by investors whose risk appetite is high. Also, not much money is required to be invested in such stocks versus the established companies since the penny stock is traded at low price. Penny stocks have a rapid possibility to grow ahead and could provide with high returns compared to other stocks.

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With this backdrop, let us look at two of the ASX listed penny stocks:

Hydrix Limited (ASX:HYD)

Hydrix is a product innovation entity improving the health, safety, and wellbeing of billions of individuals.

On 19 August, HYD released a letter to the stakeholders stating that it will be conducting an Extraordinary General Meeting on 17 September 2020 at 11:30 AM (Melbourne time). Given the coronavirus pandemic situation, Hydrix would be holding the meeting virtually through Zoom.

On 17 August 2020, Hydrix announced that it reached a significant milestone with the first supply, with four implants of AngelMed Guardian device in Singapore for Hydrix Medical. Notably, the first milestone has laid a groundwork for upcoming implants under initial access schemes in both Singapore as well as Australia.

Financial performance

In July end, Hydrix unveiled its robust business performance with soared revenue of 12.6% to AU$15 million for quarter ended 30 June 2020.

Owing to the COVID-19 headwinds, Hydrix achieved operating revenues of AU$3.0 million in Q4 FY20, highlighting slow and deferred contract conversions.

Hydrix noted a cash operating profit of AU$0.02 million during Q4 FY20, driven primarily by brisk execution of cost-cutting measures.

Despite the fact that HYD incurred cash operating loss of AU$0.26 million during FY20, it reflected a considerable improvement of AU$1.69 million over 2019.

Furthermore, Hydrix possessed cash resources of AU$4.2 million (on pro forma basis) at the end of 30 June 2020. Notably, HYD attained these cash resources after debt payment of AU$0.75 million and receipt of net funds totalled AU$3.0 million from the fully underwritten entitlement offer worth AU$2 million, and funds amounted AU$1 million to be received from placement as announced in July 2020.

The raised capital funds were utilised to repay AU$0.75 million of debt and would further be directed towards boosting working capital and balance sheet to accelerate growth initiatives (comprising in Hydrix Medical).

Additionally, Hydrix Medical experienced costs of ~AU$0.12 million in Q4 FY20, following continued progress towards planning of approvals (regulatory and reimbursement); and marketing, personnel, and transaction costs incurred to establish and procure the exclusive rights for the distribution of AngelMed’s Guardian System (an implantable heart-attack warning device).

The considerable progress of operating and strategic initiatives applied in Q4 FY20, and proceeds from capital raise completed in July 2020 has positioned the business well for FY21.

On 21 August 2020, shares of Hydrix last traded at AU$0.444, indicating a surge of 5.814% from the previous close.

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Ziocom Group Limited (ASX:ZGL)

A leading specialist equipment manufacturer and engineering service provider, Ziocom offer services in verticals such as construction; industrial and mobile equipment; precision engineering and automation; and offshore marine, oil and gas.

Investment in production of high-quality surgical masks; bridge critical shortage

On 17 August 2020, ZGL announced an investment in the production of surgical mask. Notably, as part of its Corporate Social Responsibility (CSR), the Company’s fully owned subsidiary, Sys-Mac Automation Engineering Pte Ltd and its 100% owned subsidiary iPtec Pte Ltd would manufacture high quality surgical masks to bridge the critical shortages witnessed globally, and to provide protection to healthcare workforce and people.

Furthermore, the Company would leverage its in-house engineering skills and experiences in manufacturing medical tech products; short term availability of workforce due to the pandemic induced partial lockdown measures, to design and build their own production line to produce surgical masks.

Noteworthy, the mask business is believed to generate recurrent revenue to complement mainly the Group’s capital goods business.

Suspension of business operations in Singapore

In early April, ZGL had announced the suspension of business operations starting 7 April 2020 until 4 May 2020, amid Singapore Government’s enforcement of “circuit breaker” measures to break the chain of COVID-19 infection. The suspension was anticipated to incur decline in revenue as well as affect the Company’s cash flows.

Financial performance

Let us quickly apprise ourselves with the half-year financial performance (ended 31 December 2020) of Zicom Group unveiled in late February 2020.

Following were the highlights for 1H FY20:

• The Group noted a decrease of 40.61% (pcp) in its consolidated revenue from continuing operations and reached S$31.51 million.

Source: Company’s Half-Year Financial Report, dated 28 February 2020

• The Company witnessed a fall of 56% (pcp) in the consolidated loss after tax and stood at S$4.26 million.
• Cash and bank balance were recorded of S$10.23 million, as on 31 December 2020.

On 21 August 2020, Ziocom Group share price settled at AU$ 0.065, indicating a rise of 4.175% from the previous close.

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