ASX chemicals company DGL Group Ltd (ASX: DGL) has had a rough year. Its share price has plunged more than 45% so far in 2024 and last week sank to a new 52-week low of just 44 cents. At the close on Friday, it had recovered (but only very slightly) to 45 cents.
DGL stock climbed as high as $1.10 back in February, but it quickly nosedived after the company released underwhelming financial results for the first half of FY24. However, I think investors unfairly punished DGL, and its shares could be due for a rebound as market conditions improve.
If I'm right, it means this underappreciated ASX penny stock is currently going for a steal.
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What does DGL do?
DGL is an industrial chemicals company operating in Australia and New Zealand. It has three core divisions: manufacturing, logistics, and environmental.
Manufacturing produces chemicals and industrial products, mainly for customers in the mining, automotive and agricultural sectors.
Logistics ensures the safe transport, storage and delivery of hazardous materials like toxic and corrosive chemicals. DGL serves clients across a diverse range of industries – think any company that needs chemicals at any point in its supply chain, from airlines and miners to cosmetics and pharmaceutical companies (and even pet food producers!).
Finally, the environmental division helps clients safely dispose of chemical and industrial waste. DGL works with environmental regulators to develop sustainable, environmentally friendly waste management solutions.
What caused the massive drop in the DGL share price?
DGL shares really fell off a cliff back in February after the company released its first-half FY24 results (for the six months ended 31 December 2023). Sales revenues were roughly on par with first-half FY23, but significantly higher expenses caused net profit to drop a staggering 43% to $5.9 million.
Almost 41% of the company's market cap was wiped out on the day of its results, and DGL shares have never recovered. In fact, the DGL stock price has only slid lower in the intervening months, with a stronger financial performance in the second half of FY24 doing little to win back investors.
Why DGL shares could be a bargain right now
I think FY25 will be a return to form for DGL, which could also signal a swift rebound in its share price. This means that lucky investors who snap up DGL shares at current prices could be laughing all the way to the bank this time next year.
To start with, expenses should be less of a concern for DGL in FY25.
Due to wage inflation and higher headcount, 'people costs' were a significant contributor to DGL's expense uplift in FY24.
However, both these impacts might only be transitory.
As inflation cools and labour markets soften, the negative impacts from wage uplifts should start to ease.
The higher headcount was driven by a series of acquisitions DGL has made over the past few years. The company has been on something of a buying spree recently – in FY23, it snapped up 11 companies and then added a further five to its stable in FY24.
These acquisitions added $90 million to DGL's FY24 revenues, but they also added significant people and property costs. However, these should decline as DGL generates efficiencies by fully integrating these businesses into its operating model.
Not only should cost pressures decline, but sales volumes should increase, too.
In the trading update that accompanied its FY24 financial results, DGL said it was seeing higher sales of pesticides (a significant part of its manufacturing division) as agricultural growing conditions improved in Australia.
The combined effect of higher revenues and lower costs is higher profits – and possibly a higher share price.
Should you invest in DGL?
As with any penny stock, an investment in DGL comes with heightened risks. Its share price is likely to be much more volatile than a mature blue chip and will also be much more sensitive to a bad piece of market news, which can compound your losses in a bear market.
And while I might be feeling bullish about DGL, the future remains very uncertain.
Unfortunately, global geopolitical tensions show no signs of abating, and DGL relies on international supply chains for much of its business.
If you're thinking about investing in DGL, make sure to fully consider all the potential risks involved – and don't invest more than you can afford to lose.
