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When blue-chip stocks have a sharp correction lower, it can sometimes be a great value purchase. When the same thing happens to a penny stock, it can be riskier. This is because the smaller size of the company can mean a fall could put it close to going bust. Here’s one I spotted that I’m trying to make my mind up about.
Difficult external pressures
The company is Severfield (LSE:SFR). Even though you might not have heard of it, Severfield’s the UK’s largest structural steelwork company. Its projects span high-profile commercial buildings, stadiums, bridges and more. Essentially, it’s a critical contractor in large-scale construction, delivering the steel frameworks that underpin major developments.
Over the past year, the stock’s down 60%, so the market-cap now sits at just £96m. This has been driven by a challenging operating environment, with several factors involved. Rising steel prices and broader supply chain cost inflation have squeezed margins on existing contracts.
At the same time, delays in UK infrastructure and commercial construction projects have hit revenues, leaving order book visibility under pressure. Investor sentiment toward the UK construction sector has been weak, with concerns about slow economic growth and higher borrowing costs dampening demand for large-scale projects.
These external pressures have hit the stock hard, with full-year results released in June showing a statutory operating loss of £13.7m compared with a profit of £26.4m from the previous year.
Why it could be a great pick
A trading update earlier this week showed various positive green shoots. It reaffirmed the guidance for the coming quarters, so it appears there won’t be any large negative shocks financially. The UK and Europe order book is “providing the group with a good volume of future work”. In India, its joint venture is also performing better than expected. This helps to diversify revenues away from the UK market.
The company’s welcoming a new CEO, Paul McNerney, who is joining with 25 years of sector experience. If you want someone to help get the business back on track, this kind of experience should certainly help to reassure investors.
For some of the external factors, I think the pressures should ease. Steel prices are stabilising and supply chain bottlenecks are improving, which should help margins recover. Severfield also benefits from government-backed infrastructure projects, which are less cyclical than private developments. This should help to cushion any further negative impact from private sector demand.
With a price-to-earnings ratio of 7.51, I do think it offers attractive value. Granted, the risks relating to sentiment around the construction sector could linger for a while. Yet when looking at this for the long term, I’m seriously thinking about buying the stock for my portfolio.
