Investing in penny stocks can be a great way to find hidden opportunities that are below the radar for most investors.
Although these companies can carry extra risks, many of them are sizeable, well-established businesses in real life — they’re just small by stock market standards.
Today, I want to look at penny shares that look decent value to me right now.
A strong turnaround
Construction and engineering group Costain (LSE: COST) specialises in infrastructure projects in sectors such as road, rail, and water. I’d expect that the long-term nature of this work should mean that Costain will be less affected by an economic downturn than businesses focused on commercial construction.
That’s not to say Costain hasn’t had problems. Just before the pandemic, the company was hit by £90m of losses on two big contracts that went wrong.
The pandemic then caused further problems, as some construction activity was paused. To stay afloat, Costain was forced to raise £100m from shareholders in 2020.
However, the group’s current management wasn’t responsible for these problems and have made changes to make future repeats less likely. The business now seems to be performing well.
Costain’s last results showed pre-tax profit up by 40% during the six months to 30 June. CEO Alex Vaughan said that bidding activity remained strong, especially in road and rail projects.
The order book stood at £2.7bn at the end of June last year and the company said that 90% of its revenue for the remainder of 2022 was already secure.
City analysts covering Costain shares have increased their earnings estimates for the company recently. However, the shares currently trade on a 2023 forecast price-to-earnings (P/E) ratio of just 4.3, which is unusually low.
2022 results are due later this month and should include an update on the outlook for this year. If the numbers are in line with expectations, I think the shares could do well. In my view, this could be a good buying opportunity.
An overlooked bargain?
My next pick also operates in the construction sector but is quite different. Severfield (LSE: SFR) is one of the UK’s leading producers of structural steel. This is used for large commercial projects such as office blocks, data centres and warehouses, as well as transport and other infrastructure.
It said its order book stood at £464m at the start of November, which is equivalent to around one year’s revenue. The company also said that the pipeline of new opportunities was still at “consistently high levels”.
The group’s pre-tax profit rose by 17% to £12m between March and September last year, compared to the same period a year earlier. The interim dividend was increased by 8%, putting the shares on track to deliver a 5.5% dividend yield this year.
I’ve followed Severfield’s progress for a while and haven’t found any serious problems.
At current levels, the shares are trading on a 2023 forecast P/E ratio of seven times earnings. That seems reasonably cautious to me. If trading remains stable this year as expected, I think the stock could perform quite well from this level.
