Michelmersh Brick Holdings Faces Challenges Amid Market Fluctuations
Michelmersh Brick Holdings (LSE: MBH) has seen a notable decline, with its stock price dropping 17% since July. Now, the company finds itself in the penny stock realm with a market cap of £86 million and shares priced at 95 points.
Owning a diverse range of brick brands in the UK, Michelmersh produces over 120 million clay bricks and pavements annually. However, it’s a tough environment. On September 2nd, I noted this firsthand while examining six months of performance results.
The company’s revenues edged up 1.1%, reaching £35.8 million, yet their overall margin shrank from 36.2% to 33.6%. Meanwhile, earnings per share (EPS) took a hit, dropping 3.3p—about a 23% decrease. Those are not exactly encouraging numbers.
Chairman Tony Morris highlighted the unpredictability of the broader construction sector in the UK, as well as hurdles in the Belgian brick market. According to him, UK brick dispatches are still parked 25% lower than the peak figures of 2022, and Belgium is tracking 40% below its 2022 levels.
Nevertheless, it wasn’t all doom and gloom. UK shipments managed to outperform the wider market, reporting a 3% rise since the beginning of the period, despite a two-week shutdown at the Carlton facility in January.
The provisional dividend remains steady at 1.6p per share, reflecting the board’s continued faith in the business outlook. The anticipated dividend yield is currently 5%.
Michelmersh is cautiously optimistic, anticipating that FY25 results will align closely with those of FY24, with hopes for improved trading momentum in the second half of the year. So, there’s a glimmer of resilience in their operations.
Looking ahead, they’re planning to return to a growth trajectory by 2026. To aid their journey, they have £1.5 million in net cash and access to £20 million in borrowing facilities.
Yet, it’s essential to note that challenges are still lurking. High inflation and soaring interest rates continue to pose significant obstacles for the UK’s construction sector, putting pressure on brick manufacturers like Michelmersh. This backdrop certainly introduces some risk.
If revenues this year fall slightly short of last year’s totals, the stock could hover around 14 points. I feel that if the company can regain its growth momentum next year or later, its stock might present a decent value opportunity.
In the longer run, the growth potential still seems intact. There’s a substantial need for repairs and maintenance in the housing sector, particularly with existing brick facades, amid ongoing pressures for replacing unsafe claddings.
Interestingly, two brokers have expressed optimism. On September 2nd, both Canaccord Genuity and Berenberg Bank reaffirmed a buy rating for the stock, putting a price target at 150p—slightly lowered from previous targets of 160p and 170p.
The accuracy of these broker targets is debatable and should be taken with a grain of caution. However, it’s worth noting that Michelmersh is currently trading 58% below this new target.
Berenberg believes that profits for Michelmersh should outpace sales as brick demand begins to recover. Adding the 5% dividend yield available, investing in this penny stock could lead to compelling future returns.
So, I think long-term investors might want to keep an eye on this as a potential buying opportunity.
