Brick manufacturer Michelmersh (AIM: MBH) has performed well since we highlighted its value credentials back in March. The interim results confirmed a steady first half’s trading, but the company can look forward to being a bigger player in the UK brick market following June’s transformational acquisition of Carlton.
Carlton was family-owned and is an efficient Yorkshire-based producer. It will enhance the group’s regional presence and provide opportunities to cross-sell the two companies’ output into a bigger distribution network. The enlarged business will have capacity to produce 105 million bricks, a 50 per cent increase on Michelmersh’s prior 70 million capacity. This will make it the industry’s fourth biggest with a 5.5 per cent market share.
Carlton cost £31 million, which is a reasonable 5.5 times 2016 EBITDA. It means the company has gone from being debt free to having net debt of £21 million, but there’s plenty of asset backing and the debt load is forecast to fall to £14.5 million by the end of next year. It also leaves the company with enough room to pay a progressive dividend and the shares yield just over 2 per cent currently.
Solid industry background
The industry fundamentals continue to look well underpinned. Residential housing demand remains firm with the government supportive of new build. On the supply side, deliveries are running ahead of output which suggests an improving outlook for prices. The first half has seen some modest pick up and we should expect to see low-to-mid single-digit increases in the second half. Michemersh forward order book stands at 55 million bricks, which is ahead of expectations.
On a p/e of 12 for 2018 the shares are more of a hold, having doubled since the start of the year. Though it’s worth noting the asset backing provided by the company’s land and the £130 million replacement cost of the factories, in the context of an £87 million market cap.