One penny stock I’ve added to my buy list for when I next have some cash to invest is Michelmersh Brick Holdings (LSE: MBH). Here’s why!
Bricks and tiles
Michelmersh is a manufacturer of brick, tile, and other building materials, based in Telford, UK. It operates out of its own landfill site, and manufactures its products.
As I write, Michelmersh shares are trading for 82p. They’ve experienced a slight downturn over a 12-month period as they were trading for 95p at this time last year. This equates to a 13% drop.
I’m not worried about this drop. It’s worth noting many stocks have struggled due to market volatility brought on by soaring inflation and rising interest rates. Tragic geopolitical events haven’t helped markets either.
Solid foundations and exciting growth potential
Michelmersh’s passive income opportunity immediately captured my attention. A dividend yield of 5% is higher than the FTSE 100 average of 3.9%. However, I’m conscious that dividends are never guaranteed.
Next, Michelmersh shares look decent value for money right now on a price-to-earnings ratio of just over eight.
From a growth perspective, I reckon Michelmersh could soar in the coming years, especially once market volatility cools. To start with, demand for construction products involving bricks and tiles should soar. This is linked to the chronic housing shortage in the UK. At present, demand is outstripping supply by some margin. This shortfall needs to be tackled and the government recognises this.
Another aspect that could boost Michelmersh is the fact it operates in the premium brick market. Like any product in the world, you can buy superior and inferior products. Michelmersh owns some of the largest premium brick brands in the UK. This could represent an additional revenue stream for those looking to construct with higher-end materials.
A brief trading update provided last week explained the business is performing resiliently despite the current headwinds. The business is operating at full capacity and explained this is due to a healthy forward order book.
Finally, taking a look at Michelmersh’s balance sheet, I’m pleased to see it has plenty in the bank to stave off current volatility. A solid balance sheet is vital during market volatility, especially for small-cap shares.
Risks and conclusion
Despite my bullish attitude towards Michelmersh, I must note that shorter-term performance could be hurt. Due to higher interest rates, mortgages have become increasingly difficult to obtain. In turn, this has led to a drop in house sales. Furthermore, soaring costs are making it tougher for housebuilders as well. All this has led to a drop in houses built, despite the shortage. This could impact Michelmersh’s performance and potential payouts.
Overall Michelmersh looks too good for me to miss out on right now. An attractive valuation, enticing passive income opportunity, as well as potential growth avenues have helped me decide to buy some shares when I can.
