Michelmersh going strong despite energy crisis

This time last year, Michelmersh Brick (MBH) was a £140mn market cap company. Then Russia invaded Ukraine and the subsequent gas price hike saw the energy-intensive brick manufacturer’s share price nearly half from a high of 152p last September to a low of 84p earlier this year.

However, as Michlemersh adjusts to this new world order, there are encouraging signs it is much more than just surviving. Profit and revenue are up in its results for the six months to June this year and are forecast to continue growing over the next two years.

Part of the reason for this is the company’s hedging of energy costs, with all of 2022 now covered, but the bigger reason is that demand continues to outstrip supply. After a pause during Covid-19, builders of all stripes are at work again and its results show that Michelmersh has been able to pass any cost increases onto its customers. Even if the housing market does turn south, it is unlikely that the structural undersupply of housing and the need for raw materials will change. As for the chunk of customers buying bricks for extension building or home renovation, a recession could well put these homeowners off, but it could also encourage them to invest in the asset more in order to pump up its resale value.

Either way, this is a company which is growing and which has a simple plan for future growth: increase output and acquire other businesses. There are headwinds ahead, for sure, but Michelmersh’s £9mn cash buffer should help with that.

Following a dismal 12 months for the share price, the stock now looks undervalued and oversold considering its below average price to earnings ratio. Counter-intuitive buy.

Last IC View: Hold, 114p, 30 Mar 2022