Michelmersh Brick Holdings – 9 times pe, 4% yield, NAV of 90p and no debt
This company, whose results are due this coming Friday, is nowhere near as boring as it first appears – it has a useful share of the premium end of its market, it is cash positive, profitable and trading on only 9 times historic earnings while yielding 4%, what is more its equity is undervalued.
Established in 1997, the Haywards Heath, West Sussex-based Michelmersh Brick Holdings (LON:MBH) is involved in the manufacture and sale of bricks, tiles, and building products in the UK and Europe.
Premium clay products
The group aims to lead the way in producing Britain’s premium clay products.
Describing itself as Britain’s Brick Specialist, leaders of traditional had-pressed architectural terra cotta and Europe’s trust ed clay brick manufacturer.
It makes over 125m clay bricks and pavers each year.
The group, which is the UK’s largest specialist brick manufacturer, has some 5% of the UK market.
Its 370-plus employees work in six plants and factories, five of which are in the UK and with the sixth in Belgium.
Each Michelmersh factory uses clay from its local quarry, which is never more than 2.5km away.
The factories use two different types of manufacturing process, soft mud and stiff mud or extruded.
Clay is the most important part of the brick, the recipe for making includes clay, sand and water mixed together with a substance that speeds up the firing process.
Its various brands
Taking in over 150 core range products, the group markets under seven market leading brand names.
Each facility produces different brick types with varying colours, styles and textures.
Under the Blockleys brand it offers extruded wire cut facing bricks, clay pavers, paving accessories, and special shaped products (23m output pa).
The Carlton brand provides monotone colour blends in rustic, drag wire, smooth, and sand faced textures (36m).
The Charnwood brand covers handmade bricks and special products (4m).
Under the Floren.be brand it supplies a spectrum of bricks (21m).
Freshfield Lane is the brand used for clamp-fired stock-facing bricks in various textural finishes (34m).
The Hathern Terra Cotta brand range takes in traditional hand-pressed architectural terra cotta and faience, and various architectural components.
Finally, the Michelmersh brand includes facing bricks and special shaped bricks (7m).
The company also includes a landfill operator, New Acres Ltd, and seeks to develop future landfill and development opportunities on ancillary land assets.
The group is at the forefront of industry innovation being the first UK clay product manufacturer to offer intuitive Building Information Modelling files, hosted on its dedicated platform www.bimbricks.com.
In addition, to complement its innovative decarbonisation strategy, it also conducted the World’s first 100% Hydrogen fired clay brick trials in a feasability study named HyBrick.
The Michelmersh Group has over 500 acres of land, encouraging the re-introduction of habitats and wildlife to its former quarry sites, to allow nature reserves, lakes and natural spaces to flourish.
Sales per region and business
The group has strong core demand for its products – particularly in the Repair, Maintenance and Improvement market, as well as in Commercial, Housing, Urban Regeneration and in the Specification market.
Out of the group’s total turnover for the year to end December 2021, which was £59.5m made up entirely by bricks, its sales were split 91.7% into the UK, some 8% went to Europe, with the very small balance going to the Rest of the World.
There are some 95.7m shares in issue.
The larger holders include Eric Gadsden (23.7%) and Martin Warner, chmn (4.32%).
Institutional holders include BennBridge (7.99%), Hosking Partners (6.77%), Canaccord Genuity Wealth (5.22%), Interactive Investor (5.15%), Hargreaves Lansdown Stockbrokers (4.20%), Hargreaves Lansdown Asset Management (3.91%), Sanford DeLand Asset Management (3.91%) and Australian Retirement Trust Pty (3.05%).
Broker’s Views – 180p price objective
Analyst James Wood, at the group’s NOMAD and Joint Broker Canaccord Genuity, rates the shares as a Buy, having pitched a price objective of 180p a share.
For the year to end December 2022 he goes for sales of £67.0m (£59.5m), adjusted pre-tax profits of £11.9m (£10.9m), generating earnings of 10.1p (9.3p) and a dividend of 3.7p (3.6p) per share. He suggests that net cash at the year end was around £9.0m (£8.0m).
For the current year the broker’s estimate sales lifting to £83.5m, taking profits up to £12.8m, earnings to 10.4p and paying a 3.9p dividend.
For the next year the estimates are for £85.7m revenues, £13.4m profits, 10.7p earnings and a 4.1p dividend.
My View – going to 115p and higher
With net assets worth at least the current share price, the downside is minimal.
The UK brick industry stocks have remained low, however the ageing UK housing stock makes the group’s RMI market opportunities look appealing, so any easing in Housing demand should be balanced.
A year ago, they were trading at 128p, last Friday night the group’s shares closed at 91p, valuing the company at just £87m.
Considering its balance sheet, its cash, its profits and its undervalued assets, this group’s share are going a lot higher yet.
My Target Price is now set at 115p, which is an easy aspiration.