I’m buying this penny stock and believe it could be set to fly high

This Fool takes a closer look at a penny stock that operates in an industry that is booming and could help it to grow exponentially.

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Many industries are under pressure at present due to soaring inflation and rising interest rates. Construction is also impacted but there’s one penny stock in the sector that I believe could still perform well during the current storm. It is Severfield (LSE: SFR). Here’s why I’m buying some shares.

Steel for construction

Severfield is one of the UK’s leading suppliers of structural steel for major construction projects. This includes steel required for major buildings like stadiums, car parks, bridges, shopping centres, and more.

It is worth remembering that a penny stock is one that trades for less than £1. As I write, Severfield shares are trading for 69p. At this time last year, the shares were trading for 60p, which equates to a 15% rise over a 12-month period. It is worth noting that many stocks are down over this period due to the macroeconomic issues mentioned earlier pushing down global markets.

Infrastructure boom and solid fundamentals

Although the construction sector is impacted by economic issues, the government tends to focus on infrastructure spending to stimulate the economy. Furthermore, larger projects are scheduled and planned years before any work begins. I believe Severfield can benefit from all of this to boost future earnings and shareholder returns. After all, structural steel is a major component of any larger construction project.

At present, Severfield shares look good value for money to me on a price-to-earnings ratio of 10. In addition to this, they would boost my passive income stream on a dividend yield of 4.8%. This is above average for a penny stock. However, I am conscious that dividends are never guaranteed.

Finally, Severfield released excellent results for 2023 last month. It said that revenue increased by 21% compared to the previous year. More tellingly, profit increased by 23%, which was higher than expected. Earnings per share increased and it hiked its dividend by 10%. Furthermore, forecasts for the next two fiscal years look great in respect of revenue, profit, sales, and shareholder return growth. This is underpinned by an excellent order book and pipeline.

A penny stock I’d buy despite the risks

From a bearish perspective, Severfield could see its forecast for future results impacted by inflationary pressures. This is something it referenced in its annual report. Rising costs could eat into profit margins, which underpin growth plans as well shareholder returns.

Finally, Severfield does have a bit of debt on its books. This is something for me to bear in mind as debt is costlier to service when interest rates are rising. This increased cost could impact investor returns.

Despite the risks involved, I’m planning on buying Severfield shares. The passive income opportunity and recent results as well as an exciting forecast for the future have helped me to come to my decision. However, I do understand that past performance and forecasts are never a guarantee of the future. I’m buoyed by the general infrastructure boom throughout the UK and the EU, which should help Severfield boost its earnings, returns, and in turn, my holdings.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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