Michelmersh Brick (AIM: MBH) has recovered from the production difficulties experienced at one of its plants earlier last year. Results for 2016 were as expected, while the dividend was doubled to 2p, which was better than forecast and is a positive signal for the future.
We hear a lot about the housing shortage, but as Joint CEO Frank Hanna pointed out to GCI, the UK built 20,000 fewer homes last year than we did a decade earlier. At least that shortfall should underpin demand going forward, coupled with the fact that the number of brick works has shrunk from 83 to 54 over this period. Despite that, 2016 saw a soft market, partly due to destocking in the industry. However Michelmersh has a strong forward order book and a confident outlook. It operates four plants with half its output sold to the repair, maintenance and improvement sector as opposed to new-build.
Its balance sheet has improved, supporting the higher dividend. The company reported net cash of £4.7 million which is 10 per cent of its market cap. The shares are also well-supported by the company’s land holdings. It sees itself as a long-term operator and steward of its quarries which are in the books at modest valuations. Occasionally a site will be sold, which is the case currently with Dunton where a landfill consent has been obtained. This deal will bring in £2.7 million in 2017; but land disposals will remain relatively rare events.
The improved dividend, net cash and asset backing put Michelmersh firmly into the ‘value stock’ category. Cash is forecast to grow to over £7 million this year and at 62p the shares yield over 3 per cent with scope to grow the dividend further. They also trade at a small discount to the company’s conservatively-stated net asset value.