Michelmersh Brick maintains solidity in tough market

Michelmersh Brick (MBH) managed to maintain growth in a year in which UK brick despatches were down by 30 per cent, which the company attributed to the fact that it serves a “broad range” of customers, mainly at the premium end of the market. 

With housebuilders only making up around a third of its end markets, it managed to achieve a like-for-like sales increase of 1.3 per cent, although its operating margin fell by a full percentage point to 16 per cent. This was due in part to the integration of the FabSpeed brick cladding business, which itself is slightly more exposed to the volume housebuilders. However, the company also had to make trade-offs in terms of its pricing strategy, with chief financial officer Ryan Mahoney arguing that introducing unscheduled or unexpected price increases makes life more difficult for its distributors. It has held prices at the start of this year, given the “uncertain” demand environment.

The company continues to be debt-free, though, and the £13.6mn of cash generated from operations last year allowed it to buy £2mn of its own shares back as well as pay out £4mn in dividends. A cash balance (excluding leases) of £11mn and an undrawn borrowing facility of £20mn also offers “strategic optionality”, in terms of either acquiring assets in a depressed market or returning more cash to shareholders.

So, even with Investec analyst Aynsley Lammin forecasting a 15 per cent slide in earnings per share this year, the 4.2 per cent dividend yield on offer means a price/earnings multiple of 10.6 times doesn’t look excessive given the potential for a re-rating as end markets improve. Buy.

Last IC view: Hold, 88p, 5 Sep 2023