1 ASX penny stock to buy in May while it is still only 47 cents

Bell Potter believes big returns could be on offer from this small cap.

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If you have a higher-than-average risk tolerance, then it could be worth checking out the ASX penny stock listed below.

Just over three years ago, this company was far from a penny stock with a share price of over $15.00.

But a lot has happened since then for good and for bad, which leads us to today.

The ASX penny stock in question is sports betting company Pointsbet Holdings Ltd (ASX: PBH), which is currently changing hands for 47 cents.

Is this an ASX penny stock to buy?

The team at Bell Potter thinks that Pointsbet shares are a great option at current levels.

So much so, this morning it reiterated its buy rating on the company's shares with a reduced price target of 63 cents.

It is worth noting that the reduction in its price target isn't a downgrade per se. Rather, it reflects the company's recent decision to return 39 cents per share in capital to shareholders following the completion of the sale of its US operations.

Based on the current Pointsbet share price, this new price target implies a potential upside of 34% for investors over the next 12 months.

What did the broker say?

Bell Potter has been running the rule over the ASX penny stock following the sale of its US operations and believes the market is undervaluing its businesses. It explains:

We note that, at the current share price, the Australian and Canadian businesses combined are being valued at approximately $126m assuming cash of around $30m after the second capital distribution. In our view this is too low given we value the Australian business alone at $150m. A value of $126m for Australia – if we assume Canada is worth nothing – equates to an EBITDA multiple of c.8x based on our FY25 forecasts (after allocating a portion of corporate overheads). But obviously we believe Canada is worth something – as well as the Banach technology – so the actual multiple being applied to Australia is <8x.

The broker also believes that Pointsbet could be an attractive takeover target for one of its rivals. It adds:

We also believe PointsBet is a potential takeover target given the simplified structure (just Australia and Canada), the shift to cash flow/EBITDA positive, the sufficiently strong Balance Street, the proprietary technology and it being the fifth largest player in Australia. The market here is now relatively mature so in our view the only way to grow meaningfully is through consolidation and PointsBet is an obvious potential target.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended PointsBet. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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