Michelmersh's order book provides solidity

Michelmersh Brick’s (MBH) half-year numbers would look decent enough in a relatively benign period of activity for building materials producers, but the fact that it achieved double-digit organic revenue growth at a time when established competitors like Ibstock (IBST) and Forterra (FORT) were reporting double-digit declines looks like quite an achievement.

Higher inflation and the accompanying rise in interest rates hit demand for home loans, affecting both the new-build and home improvement markets, leading to a 25 per cent sector-wide decline in demand for bricks. The oft-touted structural shortage in capacity has (for now at least) proved illusory, with inventory levels currently at a five-year high and some competitors taking action to curtail supply.

However, Michelmersh, which serves the premium end of the market, has continued to barrel ahead. It cited a "well-balanced" order book and an ability to pass through higher costs as factors that allowed it to continue growth in sales and profits, albeit margins weakened slightly. Net cash (excluding leases) increased by nearly £1mn to £11.8mn, helped by a land sale.

Michelmersh spent £1mn on buybacks during the first half and announced plans to increase this by a further £2mn in June. The interim dividend was also lifted by 15 per cent to 1.5p.

Despite this, negativity around the sector’s outlook means Michelmersh’s shares are down 11 per cent year-to-date. They trade at under 9-times Investec’s forecast earnings of 9.9p per share and offer a dividend yield of 5 per cent. Although we agree with the broker's assertion that the company's “delivery merits a better valuation”, we’re also conscious of the fact that it can only outrun the slump in its end markets for so long. Hold.

Last IC View: Hold, 94p, 29 Mar 2023