This penny stock has been on my watchlist for a while. Steppe Cement (LSE:STCM) is a Kazakh cement manufacturer, which some investors may know for its sizeable dividend yield.
The stock has dipped 12% over the last month, and I think this represents a good opportunity to buy. However, I wouldn’t just buy for the dividend as I think it’s got good long-term prospects too.
Here’s why I’d buy Steppe Cement shares.
Prospects
Steppe Cement has two dry kilns and four mothballed wet kilns. The firm is the leading cement manufacturer in Kazakhstan using the dry method, which is less resource-intensive.
Steppe boasts that it enjoys competitive advantages and is one of the lowest-cost producers in Kazakhstan. Its plants are also strategically located. The Kazakh outfit claims these factors make it well positioned to grow.
But the macroeconomic indicators are positive too. The construction sector is expected to experience strong demand in the coming years as the government has put addressing housing issues at the centre of the country’s development. The sector can enhance social wellbeing and provide jobs.
Specifically, the Prime Minister’s office has forecast strong demand for housing because of the outdated nature of existing housing stock. It also points to an increase in the birth rate and the number of marriages over the past two decades.
More generally, we’re seeing an urbanisation trend in Kazakhstan, as elsewhere in the developing world, which Steppe can take advantage of.
Performance
In its recently announced results for 2021, Steppe reported a pre-tax profit increase of 63%. Profit came in at $21.4m, up from $13.1m the year before. And revenue grew 13% to $84.6m. This level of profit growth is probably unsustainable in the long run and likely reflects the fact that 2020 was a quiet year for the construction industry.
As a result, the price-to-earnings ratio currently sits at just 5.1. That’s exceptionally cheap. Its price-to-sales ratio is a little over one!
The firm said that cement volume sales grew 3% to 1.69 million tonnes, up from 1.65 million tonnes in 2020. And profits were largely driven by higher prices as the housing sector boomed. Once again, this probably reflects the fact that Covid-19-induced disruption reduced demand for cement during 2020.
It added that the Kazakh cement market increased 23% in 2021 and it expects 2022 to be at a similar level. This is certainly encouraging and reinforces the positive macroeconomic trends highlighted above.
Dividend
In its recent update, the company said it wanted to recommend the distribution of a 5p dividend for 2021. However, Steppe, which is actually registered in Malaysia, said that new tax regulations in the South-East Asian nation created uncertainty concerning the tax treatment of foreign sourced dividend income for Malaysian corporates.
A 5p dividend would be a sizeable yield. With the stock currently trading for 34p.
Risks
There are always risks and this one is no different. For one, inflation may harm profit lefts in the near term. I’m also a little concerned about the spread. The buying price is currently 34p while the selling price is 32p. This means the stock needs to gain more than 6% for me to make my money back.
Nonetheless, I see Steppe as investment for long-term growth and its sizeable dividend yield should offset the spread.
