I’m not chewing my fingernails over what impact rising interest rates will have on housebulders and on building material suppliers like penny stock Michelmersh Brick Holdings (LSE: MBH).
Latest data showing house prices rising at their fastest pace for 14 years has further assuaged my fears on this front.
However, I am worried about the impact of building product shortages on housing construction. This is something that could have near-term implications for Michelmersh and its peers.
Supply problems
Latest purchasing managers index (PMI) data this week showed a downturn in housebuilding in June. A reading of 49.3 is below the expansionary/contractionary watermark dividing line of 50. And it marked the first slowdown for more than two years.
Also in recent days, housebuilder Persimmon cut its own full-year production forecasts to between 14,500 and 15,000 new homes. It had previously expected volumes to grow between 4% and 7% year-on-year from 2021’s 14,551 delivered units.
Persimmon said that “delays in the planning system, disruption in material supply chains and challenges in securing labour” had impacted construction levels in the first half of 2022.
A dirt-cheap penny stock
This has the potential to damage demand for all building products. This includes Michelmersh, a UK share which City analysts expect to record a 40% rise in annual earnings this year.
That said, I believe recent share price weakness reflects the growing near-term threat to the brickmaker’s bottom line. Michelmersh’s share price has dropped around 30% since the beginning of 2022.
At 91p per share, the company’s forward price-to-earnings (P/E) ratio sits bang on the accepted bargain watermark of 10 times and below.
Strong homes demand
I’d happily buy Michelmersh shares despite this near-term danger. This is because I buy UK shares based on the returns I expect to make over the long haul. It’s why I continue to hold my stake in fellow brickmaker Ibstock.
Once the current problem with raw material shortages passes I expect housebuilding activity to rise strongly again. Indeed, all the country’s major housebuilders have plans to supercharge build rates to make the most of strong market conditions.
I believe property prices will continue to rise solidly during the 2020s. Interest rates are likely to remain well below their historical levels, helping to support strong demand for newbuild properties. Intense competition among Britain’s mortgage providers will also help new homebuyers get onto the ladder, as will new government purchase incentives that are coming down the line.
A top dividend-paying stock
The UK government believes 300,000 new homes have to be built each year to meet this demand. And firms like Michelmersh will play a vital role in enabling housebuilders to create their product.
I think the company’s low share price makes it a bargain right now. And especially as its penny stock status also means it carries a meaty 4.1% forward dividend yield.
