This small and overlooked company is still making money in three ways.
Back in November, I thought shares in AIM-listed specialist brick-maker on Michelmersh Brick (LSE: MBH) were beginning to look like good value at 32p.
Since then the share price has been down a bit, then rallied very slightly to its current level of 34p.
Michelmersh is the UK's largest producer of handmade bricks and clay paviors. It operates generally at the top end of the market and also produces machine-made bricks and handmade roof tiles. The company employs over 300 people at its five plants. Its products have been used in the Savoy and Harrods refurbs and at St. Pancras Station.
Now many sensible investors may have stopped reading already. The combination of an AIM-listing and a small company which relies on the construction market for successful trading are quite sufficient for many to give it the thumbs down.
Out of favour
Add to that the fact that high fuel prices are bad news for Michelmersh's brick-making costs and you have a company in the centre of a very unappealing three-ring Venn diagram. This is clearly the logical decision many investors have made over the last few years.
It is also the basis of its appeal to contrarian investors.
But maybe even that opportunity has now passed? The shares, which peaked just after the summer of property love in October 2007 at 130p, jumped off the cliff along with all the other construction lemmings reaching an absolute nadir of under 10p in the spring of 2009. They currently stand at 34p valuing the brick-maker just under £20m, so anyone buying at the perfect time has already done well.
The potential appeal at the current price lies in the company's balance sheet strength and future profitability in what remains a very small cap.
Once, twice, three times a profit
In November, I perceived value in Michelmersh on the basis of the company's ability to make money in three ways -- by buying land from which clay is extracted to make bricks, by allowing landfill on that land -- then by selling it on for development.
This is still the case and is best epitomised by its jewel in the crown development in Telford where a 100-acre site includes a quarry and landfill operation, and 80 acres of land on which a phased residential redevelopment scheme has been approved in outline by the local planning authority.
Michelmersh told us at the end of September that it was in "advanced discussions" with Persimmon (LSE: PSN) on the disposal the Telford land, via a long-term deal which is expected to provide an initial cash payment and a profit share of the eventual enlarged scheme. This is likely to include further surplus land at Telford, which will eventually provide a site for a total of around 1,200 homes.
Value will out
Once the details of the deal are confirmed, it may give the shares a fillip -- but of course the plans are in the price already.
And on the subject of energy costs, Michelmersh now hedges its gas buying and reckons to have mitigated the risks associated with fluctuations in price.
What gave the shares a bit of a boost last week was an upbeat trading statement which accompanied news of a small acquisition. The company said sales and production of bricks was better than this time last year and that it was "encouraged" for the prospects for 2011.
What this means for profitability isn't exactly clear. Profits will be lumpy due to the sale of assets -- and it's in these assets that the real value lies, with net tangible assets of around 58p per share, though the real value may be much greater as the land is accounted for on the balance sheet at cost, not as development land. The key to share price improvement lies in a rising net asset value.
Also, the nature of Michelmersh's business model means that it intends to extract real value from its balance sheet, so this isn't simply sitting there to protect the downside. Any profitability is a bonus.
The chairman and his fellow directors own 62% of the company's shares. This is a double-edged sword, raising the spectre of de-listing, but also enabling shareholders to align their interests with directors' real interests.
Michelmersh's shares still have a lot of catching up to do if the underlying value is to be realised and could have a lot further to go for patient investors.
More from David Holding:
> David owns shares in Michelmersh Brick.
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