Penny stock Costain Group (LSE:COST) is currently trading at its lowest level in five years. In addition to this, I believe it has excellent growth prospects ahead. I would be willing to buy some shares for my holdings. Here’s why.
Construction business
Costain is a UK-based construction and engineering business that provides a mix of solutions and services. It utilises technology to add value to clients’ construction projects and has experience working in several industries including rail, aviation, defence, and water.
A penny stock is one that trades for less than £1. Costain shares are currently trading for 35p. At this time last year, the shares were trading for 39p, which is a 10% drop over a 12-month period. Five years ago, the shares were trading for 434p, which is a 94% drop.
Risky business
Costain has fallen foul of tougher times in the past. I believe this has contributed to its share price decline. It has a chequered record of past performance, but I am aware that past performance is not a guarantee of the future. It does look to me like things are turning around on that front, but more on that later.
Other issues that could have an impact on Costain’s growth and investment viability are the current macroeconomic headwinds. Soaring inflation, the rising cost of materials, and the supply chain crisis all have the ability to affect Costain’s operations, its balance sheet and performance, as well as investor returns. Profit margins are threatened by rising costs. The supply chain crisis could cause delays in projects and could affect customer and consumer confidence too.
A penny stock I’d buy
Costain shares look dirt cheap to me so the risk to reward ratio is favourable in my eyes. But what has helped me come to the conclusion that I would add the shares to my holdings? Well, a few things.
Firstly, the construction market here in the UK is a favourable one and currently booming. Housing construction as well as infrastructure spend is increasing. This has been exacerbated by the pandemic as many projects struggled to continue operations during the height of it. A business like Costain with its profile and presence should be primed to benefit from this upward trend.
Next, Costain has a healthy order book that should underpin future growth and performance. It currently has close to £3.5bn worth of orders on file for future and continues to hunt for new projects and business too. This order book alone should boost its balance sheet and hopefully equate to the investor returns in the longer term.
Reviewing Costain’s more recent performance, I noted that it has managed to reduce losses since 2020 and into 2021. Losses dropped from £96.1 to just £13.3m. Furthermore, revenue increased from £978m to over £1bn and this was underpinned by improving operating margin too.
With the current outlook for the UK construction industry and at just 35p per share, Costain shares are a no-brainer buy for me. My investment strategy has always been to buy and hold for the long term so I’m not expecting a quick profit or return. I’m willing to wait, but if the shares don’t perform, I won’t have lost much of my hard-earned cash on a small number of shares.
