When I think of a penny stock, I tend to envision an embattled enterprise with a flimsy balance sheet. Or a mining explorer that’s heavy on promise and light on substance. There are certainly lots of those around.
However, some small-cap firms are regularly profitable and even pay dividends. Here, I’m going to take a look at one former penny stock that I’d buy today if I had spare cash sitting in my investment account.
Technicality
Before I start though, why am I using the phrase ‘former’ penny stock? Well, a common definition of a penny share is one that trades for less than 100p and a market cap beneath £100m.
In the case of Michelmersh Brick Holdings (LSE: MBH), it has a market cap of £97m but a share price of 104p (just above the threshold after a 28% rise over one year). Hence the ‘ex’-penny stock business.
Despite its recent jump though, the share price remains 34% below an all-time high of 158p reached back in April 2021.
Upmarket bricks
So what does the company do? As hinted at in the name, it sells bricks. However, it tends to specialise in premium bricks and pavers and owns several higher-end brands.
These are the ones that property developers will favour for upmarket residential and commercial projects. And these typically command higher profit margins compared to standard bricks (Michelmersh has a solid 36% gross margin).
Each year, the firm manufactures and fabricates more than 125m bricks and pavers every year. It also operates a landfill.
Resilience
As we know, the construction sector has really struggled over the past couple of years. Housebuilders have been hammered. This was evident in the company’s first-half results. Revenue declined 15.7% year on year to £35.4m, while adjusted pre-tax profit fell 22% to £5.3m.
The main risk here is further weakness in the construction market. And another spike in inflation certainly wouldn’t help.
However, the wider sector saw a 40% decline in brick volume demand over the 18 months to June 2024. Michelmersh’s decline was nowhere near as severe, highlighting the resilience of the business and even its ability to grow market share in a challenging environment.
Meanwhile, the company has a strong balance sheet. At the end of June, it had no debt and a net cash position of £4.1m.
Reassuringly, management said order intakes were at levels not seen since 2022. A 6.7% increase in the interim dividend demonstrates the firm’s confidence in the future.
Everything points to things slowly picking back up.
Passive income potential
Looking further out, the UK is going to have to build millions of new homes (of all types) and spruce up ageing public spaces. That sounds like a lot of bricks to me.
This should support earnings and dividend growth over time. Right now, the stock offers a 4.7% forward yield. And while no dividend is guaranteed, I’m reassured that the prospective payout is comfortably covered by expected earnings.
The icing on the cake is an attractive valuation. Based on forecast earnings per share for 2025, Michelmersh is trading on a modest forward price-to-earnings ratio of just 10.7.
All in all, I reckon the stock offers excellent value at 104p today. With cash at hand, I’d consider buying it.
The post 1 ex-penny stock I’d buy for passive income appeared first on The Motley Fool UK.
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Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
