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Michelmersh solid as a brick

Demand for bricks is outstripping supply, and Michelmersh is the only UK-owned brick producer.
June 18, 2015

As brick prices finally begin to rise following half a decade of depressed demand and oversupply, Michelmersh Brick (MBH) has begun to benefit from its massive operational gearing (the process whereby a small rise in turnover results in a far larger rise in profits). Given the brick industry's high barriers to entry, the party should continue as long as the house building sector keeps booming.

IC TIP: Buy at 81p
Tip style
Growth
Risk rating
Medium
Timescale
Medium Term
Bull points
  • Real pricing power returns
  • New facilities to boost output
  • Significant operational gearing
  • Minimal debt
Bear points
  • Dividend still modest
  • Reliance on demand for bricks

The impact of Michelmersh's operational gearing was evident in 2014's results when the benefits of a 13.5 per cent rise in brick prices - the first rise in six years - caused profits to balloon, the mechanics of which can be seen in our table below. The significance of rising prices was such that by the time 2014 results were announced broker Cenkos had upgraded its forecasts for the year by 270 per cent.

 

The operational-gearing effect

Year to 31 Dec 2014Underlying change (£)Underlying change (%)Underlying result
Turnover£2.5m10%£28.5m
Cost of sales£0.4m2.2%-£19.6m
Gross profit£2.1n31%£8.8m
Admin. Costs (net of other income)£0.2m3.5%-£5.8m
Operating profit£1.9m170%£3.1m

Source: Company

 

Operating from five manufacturing sites, Michelmersh makes a variety of bricks from the lowly house brick to more specialised items such as Terra Cotta blocks, where margins are much higher. During the economic downturn, a 1.1bn UK brick mountain grew, but finally bricks are no longer immediately available on demand. Some of the growing demand from builders is being met with imports, but shifting bricks from abroad is a costly business, which works to the advantage of domestic suppliers. That said, last year Michelmersh exported over 600,000 bricks and pavers.

 

 

Domestically, Michelmersh operates in a highly restrictive business, where barriers to entry virtually preclude new competitors. The group has sufficient reserves of clay to last at least another 20 years and there's little cost associated with in racheting up production. Furthermore, with bricks only accounting for about £3,000 of the cost of an average house, construction firms are unlikely to put up too much resistance price increases.

MICHELMERSH BRICK (MBH)
ORD PRICE:81pMARKET VALUE:£ 66m
TOUCH:80-82p12-MONTH HIGH:85pLOW: 56p
FWD DIVIDEND YIELD:1.5%FWD PE RATIO:18
NET ASSET VALUE:58pNET DEBT:5%

Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201223.00.40.5nil
201325.90.40.2nil
201428.52.62.70.5
2015*30.03.83.81
2016*31.34.54.51.2
% change+4+18+18+20

Normal market size: 3,000

Market makers: 7

Beta: 0.55

*Cenkos estimates

Michelmersh should be debt free by the end of 2015. This should underpin growth of the recently reinstated, but currently small, dividend. The strong balance sheet also supports a £2m investment to increase output from Michelmersh's Freshfield Lane site by 20 per cent, or 6m bricks, to deal with emerging capacity constrains.

Some quarries have been used for landfill, but this has been reduced to maximise access to reserves of clay and the sale of surplus land to builders.