With the UK's brick stocks low and demand strong, a six-year malaise in brick prices has sharply reversed, which is set to send profits at Michelmersh Brick (MBH) soaring. An earnings upgrade cycle appears to have already begun for Michelmersh, based on the extreme sensitivity of its bottom line to the price of bricks. Indeed, the company has chosen not to fix prices for 2014 to take full advantage of the strengthening market, and a change in house broker Cenkos' assumptions about brick price growth in March this year from 5 per cent to 7.5 per cent has already caused it to almost double 2014 EPS forecasts from 0.8p to 1.5p for 2014.
- Brick prices rising sharply
- New housing boom boosting demand
- High barriers to entry
- Net debt down significantly
- No dividend
- Reliance on brick sales
Given the forces at work in the brick market, there could be plenty more scope for forecasts to be pushed higher. From a peak of around 1.2bn, the brick stockpile in the UK built up during the recession has been reduced to around 300m. Previously, this has effectively put a lid on brick prices; there being no price increases over the last six years. That has all changed, however, as builders become more anxious to secure a supply of readily available bricks to feed their fast expanding construction sites. Brick deliveries in January were up 37 per cent from a year earlier, and more tellingly, prices in the first quarter of this year rose by 13 per cent.
The largely fixed cost nature of Michelmersh's operations means it is in a particularly strong position to benefit, which should be further helped by plans to invest £2.3m in its Freshfield Lane site to increase capacity by six million bricks a year. What's more, there are high barriers to entry in the brick business with Michelmersh's management estimating the cost of replicating its existing operations at about £100m (well above the current market capitalisation), and that's assuming the right sites could be found.
| MICHELMERSH BRICK (MBH) | ||||
|---|---|---|---|---|
| ORD PRICE: | 71p | MARKET VALUE: | £57m | |
| TOUCH: | 70-72p | 12-MONTH HIGH: | 75p | LOW: 30p |
| FWD DIVIDEND YIELD: | nil | FWD PE RATIO: | 36 | |
| NET ASSET VALUE: | 56p | NET DEBT: | 9% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 24.3 | 0.5 | 0.9 | nil |
| 2012 | 24.5 | 0.1 | 0.8 | nil |
| 2013 | 25.9 | 0.2 | 0.2 | nil |
| 2014* | 25.4 | 1.2 | 1.5 | nil |
| 2015* | 28.8 | 2.1 | 2.0 | nil |
| % change | +13 | +75 | +33 | - |
Normal market size: 560 Market makers: 6 Beta: 0.04 *Cenkos estimates, adjusted PTP and EPS figures | ||||
The fast improving trading conditions that started to emerge in the second half of 2013 are in stark contrast to the burden of stagnant markets and rising energy costs that Michelmersh had previously been grappling with. To help it through the famine of new orders, the company disposed of surplus land and closed a small site. Broker Cenkos puts an underlying value on the group's remaining investment land of 26p a share.
Operating costs have also been held tightly in check, and net operating working capital fell by over £4m last year as demand was met by selling off brick stocks accumulated in the downturn. Funds were also boosted by a share placement that generated a net cash inflow of £9m, which together with cash generated from operations rising from £1.6m to £3.8m, helped to reduce net debt from £18.4m in 2012 to £4.2m.
