Michelmersh Brick hits pricing wall

Given the hike in energy, labour and other costs that Michelmersh Brick (MBH) has had to contend with over the past 12 months, the fact that it has managed to maintain margins is a sign of the brickmaker’s resilience.

Inflation, mainly through higher utilities bills, reduced its profit margin by around 200 basis points in the first half, but a second price rise implemented in July last year meant it recovered lost ground by the year-end. Operating profit grew by 17 per cent on a 15 per cent increase in revenue. 

The company is keeping a handle on costs, using hedges to fix more than 90 per cent of its energy requirements for this year, with further deals stretching into 2024 and 2025. This is necessary, though, as weaker end markets limit its ability to push through further price hikes. 

Joint chief executive Frank Hanna said the company would “stabilise our pricing environment”, focusing on its long-term relationships. Chief financial officer Ryan Mahoney added that it would prioritise earnings growth over margin protection.

Although the company rightly points out that the brick market remains underserved, with inventory drawdowns for most of last year meaning stocks of 305mn at the start of this year remained below the five-year average of 350mn.

However, the market turned in November, with housing demand weakening following the disastrous mini-Budget. The Construction Products Association forecasts a 4.7 per cent contraction this year. 

Tougher times ahead, then, with house broker Canaccord Genuity forecasting a 2 per cent earnings per share decline to 10.4p this year. Although this translates into a price/earnings ratio of nine times, which is below peers, the risks seem weighted to the downside. Back to hold.

Last IC View: Buy, 93p, 6 Sep 2022