They are also often put off as these cheap shares often have less financial robustness. This can hamper their ability to pursue future growth opportunities and survive any trading troubles.

More fool them, I say! As a long-term investor, I’m not discouraged by the possibility of a little share price turbulence. What’s more, with the right research, it’s possible to find well-funded companies with exceptional profits outlooks. Indeed, here are a couple of top ‘nearly’ penny stocks on my radar right now.

Soaring sales

I’m thinking of bulking up my exposure to the robust housing market by buying shares in Epwin Group (LSE: EPWN). This particular penny stock manufactures PVC doors, windows, cladding, guttering and wide range of other building products. So it is thriving, thanks to buoyant housebuilding rates and a healthy repair, maintenance and construction market (RMI).

Conditions in the RMI sector are particularly bright right now, and this pushed sales at Epwin 69% higher in the six months to June (and 13% higher compared with the same 2019 period). Encouragingly, the business has continued to invest to capitalise on the fertile conditions across its end markets too.

It completed on a new distribution and warehouse facility in the first half, acquired while it also bought plastic building product specialists PBS and SBS earlier in 2021.

City analysts reckon Epwin’s earnings will soar almost 300% this year and by another 23% in 2022. As a result the ‘nearly’ penny stock (which trades at 111p per share) carries a price-to-earnings growth (PEG) ratio of 0.5 for next year. I think Epwin’s a great buy despite the more immediate threat of rising component prices to its cost base.

Another great way to ride the construction boom

Keeping the building materials theme going, Michelmersh Brick Holdings (LSE: MBH) is a stock I expect to thrive during the housebuilding revolution. I own shares in its brickmaking counterpart Ibstock to make money from this construction boom. And I’m thinking of snapping up this industry giant too at current prices of 130p.

City researchers reckon earnings here will rise an extra 9% in 2022 following the 52% jump anticipated for this year. Consequently, Michelmersh changes hands on an undemanding forward price-to-earnings (P/E) ratio of 14.5 times, at current prices. I think this is particularly good value given that, according to fresh trading numbers this week, trading here continues to surpass expectations.

I’m expecting demand for new houses to continue rocketing, thanks to the enduring blend of lower-than-usual interest rates, generous government support for first-time buyers, and intense competition among mortgage lenders. So does the government, which plans to build 300,000 new homes a year by 2025.

I’d buy Michelmersh even though extreme labour shortages could hit housing construction rates and subsequently dampen demand for the company’s bricks.

This isn’t to say there aren’t a few winners out there, particularly after the year we’ve had on the markets. Here are three one-time penny stocks now requiring me to dig a bit deeper in my pockets.

Trading “materially ahead”

Market minnow Epwin (LSE: EPWN) manufacturers extrusions, moldings and fabricated low-maintenance building products. That may sound deadly dull, but I don’t think those buying the stock a year ago will be complaining. The share price has climbed nearly 70% since then. 

Back in July’s trading update, the company said revenue over the first half of 2021 had been 69% up on 2020. That’s not altogether surprising considering how bad things were last year. However, the £157.8m logged was also 13% ahead of 2019’s figure. Accordingly, management now expects full-year adjusted pre-tax profit to be “materially ahead” of previous expectations. 

However, there are still risks ahead. Supply chain issues and inflation are impacting a lot of businesses right now and Epwin’s no exception. So far, it’s been able to navigate these headwinds, but things could get worse before they get better.

Then again, the shares are still trading at a reasonable valuation price of 17 times forecast earnings for me to consider buying now. A 2.9% dividend yield easily covered by profit is another positive for me. 

Robust demand 

SigmaRoc (LSE: SRC) is another former penny stock whose shares are now trading (just) over a pound. Like Epwin, the construction materials company has clearly benefited from the revival in property over the last year. Its share price is up almost 140% since August 2020. 

Bar a prolonged market stumble, I can see this momentum continuing. Back in May, the company announced that trading had been “ahead of internal expectations“, thanks to strong private-sector demand and some large-scale infrastructure projects commencing. Since management will always be closer to the business than analysts, I take this as a buy indicator when looking for stocks for my own portfolio.

SigmaRoc has also been on an acquisition spree, buying three businesses in Belgium. More recently, it’s announced a reverse takeover of limestone developer Nordkalk for approximately €470 million. 

Half-year numbers are due on 6 September. In the meantime, the shares trade on a valuation of 19 times forecast earnings. One potential downside however, is the lack of dividends. 

Former penny stock

A final former penny stock worth mentioning is Sirius Real Estate (LSE: SRE). The company is a leading owner and operator of offices, business parks and industrial complexes in Germany.  The FTSE 250 member has also proven itself to be a great investment. The shares are up 63% over the last year. 

Of all three one-time penny stocks mentioned, SRE is probably the one I’d prioritise buying due to its arguably more diversified earnings stream. That said, it’s also the most richly valued, potentially making it riskier. A valuation of 24 times forecast earnings suggests quite a lot of good news might be priced in.

Having said this, I do wonder if there could be more upside ahead as people gradually return to their offices. Sirius seems confident, having recently snapped up four business park assets and one land parcel for around €85m. The shares also yield 2.9% this year, according to analyst projections. 

I’ve written about the stock several times over the past few years. And the main attractions have always been a cheapish valuation and a high dividend yield. But with the share price near 97p, the forward-looking yield for 2021 is as low as about 2.8%.

This small-cap stock’s business is bouncing back

The figures in today’s report show what a thump the business took from the pandemic. Revenue declined by almost 15% in 2020 and adjusted earnings per share collapsed by just over 61%. But the worst figure, in my view, is that net debt rose from just over £80m to almost £97m.

Epwin must do a lot of profitable trading in the good times that are hopefully coming if it is to pay down that big load of borrowing in time for the next economic downturn. I wouldn’t want to see the business plunge into another recession this top-heavy with debt.

And perhaps the biggest problem with the stock is that underlying operations are cyclical. Epwin makes and supplies PVC, doors, windows, cladding, guttering, decking and other stuff for the new-build and maintenance markets. And the industry is notorious for its cycles of boom and bust.

But in fairness, the business is bouncing back from the challenges of 2020. Revenue in the second half of last year came in 4% higher than the 2019 figure. And underlying operating profit was just below that of 2019. The directors reckon demand is recovering fastest from the renovation, maintenance and improvement market. The company is seeing a slower return to normal levels of demand from the new-build and social housing sectors.

Strong revenue but earnings falling short

However, despite forecasting a triple-digit percentage rebound in earnings for 2021, City analysts still expect them to fall well short of 2019’s level. But despite that, the share price is already near its 2019 peak. And I see that as a negative when considering the stock now.

But maybe there’s a good reason for the strength of the shares. The company reckons the 2020 H2 business recovery has continued into 2021 “with stronger than anticipated demand” in the first quarter. The directors said revenue is beating 2019’s performance.

However, its supply chains are “under pressure” because of the pandemic and the acceleration of demand that has emerged now. There are some shortages of PVC raw materials and the price of resin has been driven up to all-time highs. Epwin is aiming to recover its extra costs by raising selling prices to customers.

Although I think there’s a long-term tailwind behind the infrastructure and building markets, I’ve cooled on Epwin. It’s possible the business and the stock could embark on a multi-year climb from here. But neither the financial record nor the shares have progressed much overall for the past six or seven years. So I’m looking elsewhere for long-term small-cap stock opportunities.

I’d rather invest in a ‘real’ business. And one company delivering a consistent performance right now is building products manufacturer Epwin (LSE: EPWN). What’s more, the dividend yield is knocking on the door of 7% with no sign of a cut down the road. Meanwhile, the share chart shows a period of consolidation and the valuation looks low. I think the stock is worth deeper research.

Overcoming previous problems

The dividend did receive a 27% haircut in 2018, but City analysts following the firm have pencilled in increases for 2019 and 2020. Trading conditions around 2017 and 2018 were difficult when the firm lost two of its largest customers, closed its plant in Cardiff, and took an additional hit to profits because of unrecovered material cost inflation. Thankfully, things have improved since then and the company looks like it’s in recovery-mode to me.

Epwin makes PVC windows, doors, cladding, guttering, decking and prefabricated GRP building components serving the new-build and maintenance markets. You don’t need me to tell you the business is therefore cyclical in its nature. But I’m not writing off Epwin just because of that. Some cyclical firms can make jolly decent investments if you catch them right, and Epwin appears to be holding its own and trading well today.

This morning’s half-year results report reveals revenue for the first six months of the year came in broadly flat compared to the equivalent period last year. Underlying operating profit rose almost 11% and adjusted earnings per share shot up nearly 15%. I’m encouraged by those figures and so, it seems, are the directors who raised the interim dividend by almost 3%.

Nipping and tucking

The company is engaged in a consolidation and rationalisation programme aimed at reducing from seven operating units down to two on its site in Telford. The goal is to have the site developed and operational in the first half of 2020, which will “significantly” improve the logistics and finishing operations of the Window Systems business and enable the growth and development of the firm’s new aluminium window system operation, which was launched in May.

Epwin also disposed of its “non-core” glass sealed-unit manufacturing operation during the beginning of the year and acquired a decking installation business in February called PVS. My guess is such nipping and tucking will put the firm in better shape to achieve growth in the years ahead.

With the uncertainty of Brexit soon to be behind us, I reckon firms such as Epwin have a good chance of thriving. And with the share price near to 78p, the forward-looking earnings multiple for 2020 sits just below seven, which strikes me as undemanding.

The first things to strike me when looking at the share is that the valuation looks low. The price-to-earnings ratio for 2019 sits close to 7.5 and the forward-looking dividend yield is just over 6.8%. Why might that be?

The firm has had its problems

Well, I reckon the company operates in a highly cyclical sector and many cyclicals have low valuations after a long period of high profits because the stock market fears the next downturn in business. The firm also has a low market capitalisation around £105m and, generally speaking, small-cap companies attract a lower valuation than many larger names. I think that could be because investors perceive smaller companies to be riskier than large ones.

But those factors don’t tell the whole story with regard to Epwin’s valuation. Delving into today’s figures suggests the firm has endured some particular challenges that could have driven the valuation down. Indeed, revenue during 2018 came in 4% below that achieved the year before, underlying operating profit plunged 23%, the underlying operating margin slid by 19% to just 6.7%, and earnings per share rolled back by 7%. At first glance, there’s something to worry about here.

However, the report trumpets the headline, “A year of robust performance and strategic delivery,” so what’s going on? You don’t have to read far to find the root cause of the company’s problems. Epwin lost its two largest customers during 2017, which has knocked more than £27m from the revenue figure reported today. There was also a hit to revenue of just over £7m because the firm closed down its plant in Cardiff. Those things took the operating profit down too, but profits were also affected by “some unrecovered material cost inflation.”

Turning itself around

The loss of major customers is a clear blow, but Epwin reckons it made “significant” progress getting out of lower margin and unprofitable activities during the period. The report also asserted that the firm enjoyed “strong” underlying growth in revenue and gains in market share in all the company’s “key” product areas. I think this rather upbeat message has encouraged the market today with shareholders looking for a turnaround in Epwin’s fortunes.

And the firm has been busy rationalising its operations and adjusting the set-up for the future. Chief executive Jon Bednall said in the report that the strategy of site consolidations and closures to “deliver a more focused and valuable business” is going well.  2019 is off to a good start, he said, and selling prices have been going up to counter the effects of rising input material prices.

Epwin’s cheap and is in full recovery mode, but it remains a cyclical outfit and a small-cap company. There’s both high upside potential and big downside risk with the share today, in my view. Over to you…

A long history of trading

Epwin manufactures and supplies PVC windows, doors, fascias, cladding, guttering, decking and prefabricated GRP building components and has been around since 1976. It started out as “one of the first” PVC-U window fabrication firms in Britain and has grown organically and by acquisition to become the beast that it is today operating from “a number” of locations in the UK.

The directors claim that the brands the firm has developed and acquired are market-leading and help to “maximise the sales opportunities” in the “diverse and fragmented” repair, maintenance and improvement (RMI) and new-build markets. But brands such as Profile22, Spectus, Swish, PatioMaster, Permadoor, ecodek and Tempest are probably not household names, even though they might be well known in the industry.

There will be a lot of cyclicality in the business because of the markets the company serves, and I reckon that shows up in the record of cash flow over the past few years, which wiggles up and down. Today’s report revealed that revenue slipped 5% compared to the equivalent period last year, but underlying operating profit slumped 36%, and adjusted earnings per share plummeted 42%. I think the firm’s difficulties show up most in the figure for the underlying operating margin, which fell by 32%. When faced with such a poor financial performance it’s no surprise that the directors cut the interim dividend by almost 24%.

The medium-term outlook is positive

Prior to the period, Epwin lost two large customers, but revenue held up better than the directors expected. But inflation around materials and labour ate into profits and the firm is introducing price increases to address the problem. On top of that, the company is engaged in a lot of nipping and tucking of operations aimed at reducing its cost base and improving operational efficiency – all actions you would expect when profits decline.  

Looking forward, the company sees weak consumer confidence in the short term leading to ongoing “lacklustre” market conditions. But the medium-term demand for the company’s products will likely be driven by today’s under-investment in existing UK housing stock and an ongoing buoyant market for new homes. On top of that, the directors expect “greater weighting of profit towards the seasonally busier second half of the year than in more recent years.” I read chief executive Jon Bednall’s comments as being optimistic. He said he is confident in the long-term prospects for the RMI market and Epwin will continue its strategy of improving operations, developing and expanding its range of products, and seeking acquisitions. I reckon today’s low valuation and high dividend yield look attractive.

Of course, it’s not the only dividend growth stock that could be worth buying. A relatively small and risky stock that reported on Wednesday may offer high total return potential over the long run.

Resilient performance

The company in question is Epwin Group (LSE: EPWN). The manufacturer of low-maintenance building products delivered a robust performance in its half-year trading update despite challenging trading conditions. Revenue during the period was better than expected, falling from £149.9m in the first half of the previous year to £142.4m. It was hit by adverse weather conditions, as well as the loss of its two largest customers in the second half of 2017.

Looking ahead, Epwin is expected to deliver adjusted pre-tax profit for the current year in line with expectations. It anticipates a seasonally busier second half of the year, although market conditions are due to remain lacklustre in the near term.

The company’s dividend yield currently stands at 6.8%. Its dividend payments are expected to be covered twice by profit in the current year, which suggests they’re sustainable at their current level. Since the stock trades on a price-to-earnings growth (PEG) ratio of 0.6, it appears to offer a wide margin of safety. That could mean its total return is high over the medium term.

Growth potential

The dividend potential of Diageo remains highly appealing. The stock may have a dividend yield of just 2.5% at the present time, which is 1.3% lower than the FTSE 100’s dividend yield. However, there seems to be significant scope for rapid growth over the next few years.

The main reason is the company’s exposure to fast-growing markets. For example, it has a strong foothold in China, where the size of the middle-class is expected to grow significantly in future years. Higher disposable incomes and an increasingly consumer-focused outlook for emerging economies could mean that the company is well-placed to deliver impressive earnings growth over the long run. And with it having exposure to relatively stable markets across the developed world, it seems to offer an appealing mix of growth potential and resilient financial prospects.

Diageo’s dividend could also be set to rise rapidly due to its dividend cover. Its shareholder payouts are currently covered 1.8 times by profit, which suggests that dividends could grow at a faster pace than profit without becoming unaffordable. As such, the stock seems to offer an encouraging income outlook, which could have a very positive impact on your retirement savings.

However, this FTSE 100 utility has a history of adapting well to external factors. So much so that it’s built a long record of delivering value to shareholders through annual dividend increases. Indeed, its dividend record is unrivalled by any of its blue-chip peers across the whole utilities sector. As such, I believe the current share price represents an excellent buying opportunity.

Good compensation for uncertainty

In a trading update in January, SSE said it expects to deliver earnings per share (EPS) in the range of 116p-120p for its financial year to 31 March (results scheduled for release on 25 May). It also said it expects to report “an annual increase in the full-year dividend that at least keeps pace with RPI inflation.” The consensus among City analysts is for a 3.4% increase to 94.4p. At the current share price, the price-to-earnings (P/E) ratio, based on the mid-point of management’s EPS guidance, is 10.9 and the dividend yield, based on the consensus forecast, is 7.3%.

SSE expects to demerge its GB household energy supply and services business by the last quarter of 2018, or the first quarter of 2019. While the board has said it remains “committed to remunerating shareholders’ investment through the payment of dividends,” it has also said it will set out its future dividend policy in its demerger circular, which is expected to be published in June. So there’s some uncertainty here. But in my view, it’s more than compensated for by the historically cheap P/E and huge yield.

Resilient performance

Epwin (LSE: EPWN) is a leading manufacturer of low maintenance building products, supplying mainly the Repair, Maintenance and Improvement (RMI) market, but also new build and social housing. I like the long-term growth drivers in the RMI market, but conditions are challenging at present. Input costs have risen due to the weakness of sterling and Brexit uncertainty has subdued activity. Furthermore, Epwin’s two largest customers went into administration last year.

Despite the challenges, the company today reported what it called “a resilient performance” in 2017. Adjusted EPS came in at 13.47p, 10% lower than 2016, and the company highlighted “continued strong cash generation.” In the half-year results in September, management said cash generation gave it confidence in “our ability to offer an attractive dividend to shareholders.” 

Today, it increased the full-year payout by 1.4% to 6.69p, giving a yield of 8.6% at a current share price of 78p, down 1.9% on the day.

Generous valuation

However, the board has announced a new dividend policy for future years, namely, “a progressive dividend that is approximately twice covered by adjusted after tax profits.” This would imply a 5.3p dividend (6.8% yield) for 2018, based on a consensus EPS forecast of 10.6p (P/E of 7.4).

Epwin’s primary market remains challenging, but a cost reduction programme and a robust balance sheet to support ongoing investment in products, acquisitions and organic growth suggest to me that the prospective P/E and yield are far too generous. As such, I rate the stock a ‘buy’.

The market’s often right but now and again it gets it wrong. Today, I’m looking at two companies sporting yields in excess of 9%. Are these yields dangerous … or too good to ignore?

Expectations

Shares of low-maintenance building products manufacturer Epwin (LSE: EPWN) are down less than 3% as I’m writing, despite the company saying in its first-half results this morning that it expects the full-year performance to be “slightly below current market expectations.”

Furthermore, it said it also now expects the performance for 2018 to be “lower than the market expectation for the current financial year.” The analyst consensus ahead of today’s results had been for a return to modest growth in 2018. So why has the market not trashed the share price?

Trading

Epwin had already notified the market of the potential loss of two customers (10% of revenue) for reasons entirely out of the company’s hands. So, that was largely priced-in.

On the wider front, it said that trading conditions in its key repair, maintenance and improvement area “remain subdued” but that management is “confident of the long-term growth drivers” in the market. It also said that the newbuild market “continues to be strong” and that there are “indications of improved demand” in social housing. Meanwhile, it’s already begun adjusting its cost base, which should mitigate some of the pressure on margins from higher input costs due to the weakness of sterling.

An attractive dividend?

The board upped the interim dividend by 1.4% today, making the trailing payout 6.63p and giving a running yield of 9.5% at a current share price of 70p. It said: “We are confident in continuing our record of strong cash generation and our ability to offer an attractive dividend to shareholders.”

I note that even if 2018 earnings came in 50% lower than the analyst consensus ahead of today’s results, the dividend would still be covered. I see this £100m AIM stock as one with recovery potential that might manage to maintain its dividend in the absence of a serious deterioration in trading. As such, I rate it a higher-risk buy.

Another attractive dividend?

Specialist distributor Connect (LSE: CNCT) is another company seeing mixed trading conditions across its businesses in “more challenging market conditions.” The recent sale of its Education & Care business looks a good move, as it will enable the group to focus on opportunities and synergies in its News & Media, Parcel Freight and Books divisions.

In its half-year results in April, the board increased the interim dividend by 3.3%, making the trailing payout 9.6p and giving a running yield of 9.3% at a current share price of 103.5p. Management said the uplift in the interim dividend “reflects confidence in the ongoing strength of the group.”

I see this £256m FTSE SmallCap stock as another with recovery potential that could provide the bonus of a maintained dividend. So, as with Epwin, I rate Connect as a higher-risk buy.

The company, which manufactures low maintenance building products, was last dealing 20% lower from Tuesday’s close. It is now trading at record lows below 80p per share.

Epwin said sales and operating profits during January-June matched the board’s expectations, “despite market conditions, particularly in the key RMI market, remaining challenging.” However, it announced that profits for the full year are likely to be “marginally below market expectations.”

The Solihull business noted that “materials price inflation has… had an increasingly significant impact upon costs in the period and this continues to be the case.” And in response to these problems, Epwin has now started a programme designed to adjust its capacity and cost base.

However, stock pickers elected to take flight after the business advised of problems at two of its customers, each of which account for around 5% of its total revenues. One has significant funding issues and is undertaking a strategic review, while the other has sold its plastic distribution business, which is principally supplied by Epwin, to a competitor of the group, it said.

Rather worryingly, it advised that the implications of these troubles “remain unclear at this stage.”

A risky selection

Despite these developments, the chief executive remains positive over Epwin’s prospects and said that while the current market conditions continue to be challenging, “we remain confident of the long-term growth drivers in the RMI market and continue to progress with our strategy, focused on operational improvement, selective acquisitions to broaden our product portfolio, cross‐selling across our brands and product development.”

I am not so convinced however, with the current troubles at Epwin’s key clients adding an extra layer of risk to the company’s revenues outlook in the near term and beyond.

The City had been expecting earnings to edge just 1% and 3% higher in 2017 and 2018 respectively. But today’s profit warning is likely to see these forecasts scythed, making a low P/E ratio of 5.4 times somewhat irrelevant. Meanwhile, bad news from its pressured clients could see more downgrades down the line.

Even though Epwin appears to be a decent dividend pick — the firm sports yields of 8.8% for 2017 and 9.2% for 2018 — I reckon dip buyers should give it a wide berth right now.

Dividend diamond

I am far more optimistic on the earnings prospects over at Avon Rubber (LSE: AVON), and reckon the defence star is a particularly handsome pick at current prices.

Although the business is expected to endure a 12% earnings slip in the 12 months ending September, the company is expected to roar back with a 7% advance next year. And forecasts for the upcoming period means Avon Rubber deals on a P/E ratio of just 14.3 times.

This is excellent value, in my opinion, as recovering defence budgets propel demand for the company’s high-tech mask units higher, while improving conditions in the dairy industry should also create strong sales growth for its milking products.

On top of this, the City is also expecting dividends to keep marching higher — last year’s 9.48p per share reward is anticipated to rise to 12.3p and 15.3p this year and next, resulting in handy yields of 1.2% and 1.5% respectively. I reckon Avon Rubber is a brilliant buy today.