The world of penny stocks is notoriously volatile, as many of these businesses lack earnings and sometimes even revenue streams. But there are always exceptions. And one that’s come across my radar lately is Speedy Hire (LSE:SDY).
At a market capitalisation of £150m, it sits just outside of penny stock territory. However, with its shares trading at around 33p, it still presents an appeal to micro-cap investors while also offering a tasty 7.9% dividend yield.
The business is a provider of construction tools & equipment available for builders and contractors to hire for their projects. Hiring equipment instead of buying it has become increasingly popular over the last decade as it lowers costs and eliminates the headaches of maintenance.
It’s a tailwind that companies like Ashtead have capitalised on. In fact, Ashtead’s subsequently gone on to become the best-performing investment on the entire London Stock Exchange in the last 25 years, delivering a 6,150% total return! And it seems Speedy Hire’s trying to follow in its footsteps.
The great expansion
Higher interest rates have been quite disastrous for the construction industry lately. With many projects funded by debt, a lot of builders and businesses have been hitting pause on new commitments until a more friendly lending environment emerges. And the impact of this on Speed Hire’s latest financials is perfectly clear.
Revenue in the 12 months leading to March stagnated, falling by 4.3% to £421.5m, with underlying profits sliding 6.8% to £96.8m from £103.9m.
However, now that interest rates are starting to fall, activity within the construction industry’s steadily picking back up. Since March, the S&P Global UK Construction PMI – an index that tracks performance in the British construction sector – has been rising. And as of September, it sits at 57.2 (anything above 50 indicates industry expansion).
And that’s also emerged in Speedy Hire’s contract pipeline. £40m of new annualised revenue from new multi-year contracts have already been secured, with management announcing it has “secured further renewals and extensions” since March.
In other words, the near-penny stock’s seemingly successfully capitalising on the recovery tailwinds of the construction sector. Yet the shares, on a forward basis, still trade at a price-to-earnings ratio of 8.9 – one of the cheapest in the sector.
Risk versus reward
A discounted valuation’s definitely an interesting proposal, especially if management’s successful in returning to growth. Apart from sparking upward share price momentum, it paves the way to further dividend growth. However, there’s no denying some significant cyclical risk is attached to this business.
The stock has been a terrible performer over the last three years. And it’s a pattern that’s likely to repeat in the next cyclical downturn.
Furthermore, the rising popularity of equipment rental over ownership is a trend that other businesses are also trying to capitalise on. Speedy Hire currently controls an estimated 6% of the UK market share, coming in second place to Ashtead’s 10%. But HSS Hire and Vp Plc are hot on their tails with 5% each, not to mention the countless other private businesses chasing the same contracts.
Despite these risks, today’s valuation presents an intriguing offer, in my mind. So for investors comfortable with a bit of risk, this stock may warrant a closer look.
This post was originally published on Motley Fool
