A small and undervalued company making money in three ways.
A recent Foolish discussion thread on Michelmersh Brick (LSE: MBH) caused me to revisit this old friend recently -- and to buy a few shares having looked more closely at the business model and current valuation.
I don't expect fireworks from the brick-maker, but I do expect a steady growth in valuation from here over the next few years, as do quite a number of other Foolish investors it would seem.
Whether the shares will reach their previous giddy heights of almost 130p achieved three years ago, who can say? Many of us would be probably be slipping out of the back door long before then. But at the current price 32p of the company is valued at just £18.6m, with all the inherent risk and potential reward such an AIM-listed small cap always brings.
Michelmersh has five works, with over 300 employees, and is the UK's largest producer of handmade bricks and clay paviors. It also produces machine-made bricks and handmade roof tiles.
The company's products have been used in some of the country's most prestigious jobs, such as the restoration of St Pancras Station, as it operates at the top end of the market, commanding generally higher prices for its bricks.
Three routes to profit
What is particularly appealing about Michelmersh is the way the company tries to make money in three ways; extracting clay for manufacture, then using the sites then for landfill and development.
Over ten years ago, Michelmersh bought brick-maker Blockleys in Telford, the main jewel in the crown. The 100-acre site includes a quarry and landfill operation, and some 80 acres of land on which a phased residential redevelopment scheme has been approved in outline by the local planning authority.
The company has grown mainly through acquisition -- most recently buying Freshfield Lane Brickworks (FLB) in March -- and now operates seven distinct brands. Obviously, the acquisition trail can be the enemy of value, but Michelmersh seems to make shrewd buys and works hard to rationalise functions and to make cost-savings in the process.
Tough times
The market for bricks in the UK is a tough one, as you might imagine. I can't see this getting much better for the foreseeable. But with the half year results to the end of June, the company put in a defiantly robust performance -- whilst simultaneously acknowledging the difficult conditions.
On a turnover of £10.7m Michelmersh made an operating profit of £137k, and an overall pre-tax loss of £345k, but reckons it is well placed to achieve growth and to improve margins.
Landfill contributed £185k to overall half-year sales after a £200k profit in the last full year. This could grow over time, and the house broker expects overall earnings per share of 3.43p for 2011.
The main value, though, lies in the assets. With net tangible assets not far off twice the market capitalisation, any sustainable profit generated by the company's operations during these lean times makes it look a tempting investment. But the real value may be much greater as the land is accounted for on the balance sheet at cost, not as development land.
Realising value
We'll find out soon enough; the company tells us it is now in advanced discussions with Persimmon (LSE: PSN) on the disposal of the Telford land, via a long-term deal. This is expected to provide an initial cash payment and a profit share of the eventual enlarged scheme, including further surplus land at Telford, which will eventually provide a site for a total of around 1,200 homes. If and when the exact terms of the deal are announced, it could give the shares a boost.
The Chairman owns 39% of the shares in his company and bought £343k's worth in March at 30p as part of the placing to buy FLB. Aligning one's interest with the owners is generally a good thing, as long as the company has no plans to de-list.
Overall, Michelmersh comes across as a sensibly managed company, steadily building value brick-by-brick.
It may well take a long time for that value to come out, and there isn't much at the moment in the form of dividends to keep us happy, but that could well change -- and impatience is an investor's worst enemy.
More from David Holding:
> David owns shares in Michelmersh Brick.
