A solid set of results arrived in from Michelmersh Brick Holdings LON:MBH this morning with revenue reported up 15% at £68.4m. Gross profit was also up 11.2%. The specialist brick maker revealed strong operational cash generation of £19.7m delivering cash conversion to adjusted EBITDA of 117.9%.
We noted adjusted EBITDA of £16.4m with an EBITDA margin of 24.4% which is in line with 2021 performance. A full year dividend was announced of 2.95p, which is up 16% on 2021.
Michelmersh has reported a high quality opening order book for this year with order intake momentum continuiing into the first quarter of FY 2023.
Operational highlights include ongoing delivery of ESG targets, which remain important for end clients. The diverse range of clients also looks like a plus factor, as the company supplies not just the new build housing sector but also commercial, architectural specification and repair markets.
Michelmersh will benefit from low UK brick inventory levels
Investors need to pay attention to the incredibly low brick inventory levels in the UK. While concerns continue to swirl around housing generally, we don’t regard Michelmersh as a pure exposure housing play. It also distinguishes itself against larger players in the brick market like Ibstock LON:IBST and Forterra LON:FORT, because of the specialist nature of its output. Michelmersh can charge premium prices for its bricks and is generally more nimble as customer requirements change.Canaccord said it was assuming FY23E organic revenue growth of 10% with a 2% reduction in underlying EBITDA alongside a full year contribution from the Michelmersh Fabspeed products which are in line with historic levels. The broker is reiterating Michelmersh Brick as a BUY with a 180p price target.
Michelmersh Brick Holdings shares were trading at 94p today, and are up 13.94% over the last six months. It continues to trade at what is widely regarded as an unjustified discount against peers, with an FY23E PE (ex-cash) of 8x and an EV/EBITDA of 4x. It has a 4.8% dividend yield and a 14% free cash flow yield. This represents a significant discount relative to its (leveraged) peers which trade at an average PE of 11x for example.
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“Discount looks unjustified”
“The discount looks unjustified in our view given diverse end-market exposure while imports continue to provide some cushioning at the premium end of the UK brick market,” Canaccord said. “In addition, sector leading operating margins, strong cash generation and a net cash balance sheet are attractive characteristics, providing financial stability and [a] clear route to sustainably fund growth either organically or through selective M&A.”
Investors should note that Michelmersh picked up FabSpeed, a maker of offsite pre-built brick products such as chimneys, arches and dormers, for £6.25m back in November. Despite this cash is up (based on FY22 figures) with a 118% EBITDA cash conversion for the year. The company also has a £20 undrawn borrowing facility which lends further scope for acquisitions as required.
A quick mention also of the ongoing focus by management on sustainability, which we think will become increasingly important for institutional investors in the stock in 2023-24 as well as the company’s end clients. Michelmersh has a number of efforts underway already to make it a carbon neutral operation, and is working on a research project to use hydrogen fuel in brick manufacturing, as well as launching HyBrick on a trial basis (the world’s first 100% hydrogen fired brick product).
