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.
- Real pricing power returns
- New facilities to boost output
- Significant operational gearing
- Minimal debt
- 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 2014 | Underlying change (£) | Underlying change (%) | Underlying result |
---|---|---|---|
Turnover | £2.5m | 10% | £28.5m |
Cost of sales | £0.4m | 2.2% | -£19.6m |
Gross profit | £2.1n | 31% | £8.8m |
Admin. Costs (net of other income) | £0.2m | 3.5% | -£5.8m |
Operating profit | £1.9m | 170% | £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: | 81p | MARKET VALUE: | £ 66m | |
TOUCH: | 80-82p | 12-MONTH HIGH: | 85p | LOW: 56p |
FWD DIVIDEND YIELD: | 1.5% | FWD PE RATIO: | 18 | |
NET ASSET VALUE: | 58p | NET DEBT: | 5% |
Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
---|---|---|---|---|
2012 | 23.0 | 0.4 | 0.5 | nil |
2013 | 25.9 | 0.4 | 0.2 | nil |
2014 | 28.5 | 2.6 | 2.7 | 0.5 |
2015* | 30.0 | 3.8 | 3.8 | 1 |
2016* | 31.3 | 4.5 | 4.5 | 1.2 |
% 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.