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Michelmersh building sustainable returns one brick at a time

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Michelmersh Brick Holdings LON:MBH, could be one AIM stock that you buy now, tuck away and hold.  The West Sussex-based manufacturer of bricks and pavers was founded in 1997 and grew through both acquisition – buying up seven smaller specialist brick manufacturing companies since launch – and developing and consolidating its own manufactories across the country. Michelmersh applied to join the AIM in 2004 and is just coming up to its 20th anniversary on the market.

The company manufactures over 125 million bricks and pavers a year, and also operates a landfill business. Always aiming to be at the forefront of technology, Michelmersh created the first hydrogen-fired clay brick.

Exciting as that may be to brick-enthusiasts (and there is a dedicated community of brickophiles in the UK organised into their own association: The British Brick Society, founded in 1972, which promotes the study and recording of all aspects of the archaeology and history of bricks, brickmaking and brickwork), the most interesting thing from an investment basis is that Michelmarsh is in a very strategic place regardless of who wins the upcoming General Election in the UK.

Michelmersh Brick building back better

Both main parties have committed to the mantra: ‘build, build, build’, with the Conservatives promising 300,000 new houses a year, and the Labour Party promising to “change the face of housing”, pledging 1.5 million new homes in the next parliament if they win (which once you do the maths is still 300,000 a year). Either way, whoever wins, that’s a lot of housing units, and a lot of bricks.

The company’s shares are still affordable at GBP1 each (as at 14th May), but they might not remain as affordable for long. Over one-year Michelmersh shares returned 8.1% and over the year-to-date 3.6% with shares ranging between 75p and 108p over a 52-week period. The company has a market capitalization of GBP93.7m.

To be fair, the past two years have been a tough time for the construction industry and housebuilders. However, Michelmersh has been steadying-away. In its last results, to end-December 2023, published in March, the brick-builder reported revenue of GBP77.3m, up 13% year-on-year (but including the impact of the acquisition of FabSpeed, a fabricator of off-site pre-built brick products, for GBP6.25m in November 2022).

The company also reported a 6% increase in operating profit to GBP12.3m, which contributed to a 11% increase in earnings per share and a 4.5p dividend per share, up 5.9% year-on-year. The company also just completed a GBP2m share buyback, running between November 2022 and September 2023.

Well-placed at the premium end

Peter Sharp, CEO of Michelmersh said: “Despite the lower consumer demand in our markets, we remain well placed at the premium end of the brick market in the UK and Benelux markets. The long-term fundamentals of these markets are positive, with brick continuing to be the façade material of choice due to its longevity, sustainability and energy efficient qualities in use, low cost and broad aesthetic appeal. Importantly, the ongoing strength of our balance sheet provides us with financial strength and also the flexibility to invest in our strategic capital allocation options.”

Bridgewise, the AI-powered financial analyst rates Michelmersh as ‘Outperform’. The analyst said: “In view of Michelmersh Brick Holdings’ recent financial performance, the company’s stock seems to present an appealing investment option in the Construction Materials industry. Based on Michelmersh’s most recent financial results, the company ranks in the top 30% of Materials companies. This is primarily driven by its overperformance in Net Capital Expenditure and Return on Equity Ratio (ROE) when compared to its peers. Analyzing historical performance, better results in these two metrics have frequently coincided with an increased probability of a stock outperforming industry rivals.”

Canaccord Genuity rate Michelmersh as a ‘Buy’ with a target price of GBP1.80, whereas Berenberg Bank have a target price of GBP1.70 and also give the brick manufacturer a ‘Buy’ rating.

Michelmersh isn’t the sexiest stock, it’s not building blockchains, but building houses and is, well, as solid as a brick. It’s never going to over-excite, and it will take some effort to get Michelmersh brick To The Moon. However it is a consistent dividend-payer, even in the lean times, and is willing to share profits with its stockholders through buybacks. Michelmersh joins our ‘one to watch’ list.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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