Is there still time to snap up this ex-penny stock in May?

A penny stock no more but a promising low-cap company nonetheless. Our writer examines the growth prospects of this sustainable solutions provider.

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While searching for exciting new penny stocks recently, a construction company with a focus on sustainability caught my eye. It’s not technically a penny stock anymore as its share price is above 100p. But with only a £66m valuation, it’s certainly up-and-coming.

Alumasc (LSE:ALU) is a UK-based supplier of sustainable building solutions aimed at preserving water, reducing energy, and utilising recyclable materials. It’s been awarded the London Stock Exchange’s Green Economy Mark for its contributions towards reducing waste and improving the environment.

Why should I care?

According to a recent report by the US auditing and advisory firm Deloitte, renewables are “set for a variable-speed takeoff as historic investment, competitiveness, and demand propel their development“.

The report goes on to detail how federal investment in clean energy has never been stronger. Nor has demand from public and private entities to accelerate decarbonisation efforts. In the UK, such initiatives are even more apparent. As a company that complements this industry, Alumasc is in good stead to reap the rewards of its growth.

It’s not going to be a smooth road, though. 

In many ways, the costs of renewable energy solutions still outweigh the benefits. Wind energy, for example, often costs more to implement and maintain than the value of the energy it produces. This has been a thorn in the side of the clean energy debate for years. And while Alumasc is not directly involved in renewable energy production, its success is tied to the perceived legitimacy of the wider industry.

Should the tide of favour turn away from sustainable energy solutions, demand for Alumasc’s products would likely dwindle. I think this is unlikely considering growing concerns regarding climate change but it’s still possible.

So is it a buy?

Alumasc is just one of many small business entities poised to benefit from the growing demand for a sustainable future. But it’s one that appears to have even greater growth potential than others I’ve evaluated.

The share price is up 94% in the past five years, despite suffering significant losses in 2022 as inflation dampened the economy. As such, the weakened price is estimated to be 34% undervalued using a discounted cash flow model. Strong earnings have also pushed the trailing price-to-earnings (P/E) ratio down to 8.3, almost half the industry average.

And the cherry on top? A 5.6% dividend yield that’s well-covered by earnings and supported by a decade of consistent payments. All things considered, I see a lot of good reasons why the shares still have more room to grow.

The bottom line

Investing in penny stocks is always a more risky prospect than large-cap established companies. In this instance, the cyclical nature of the construction industry combined with strong competition and commodity price fluctuations could threaten Alumasc’s profits.

So to stay ahead of the game, it has its work cut out for it. But if it pulls it off, it could be the next big name in sustainable solutions. If I were looking to add a penny stock to my portfolio today, this would be the one.

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.

Mark Hartley 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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