Shares in the company I’m writing about today slipped below £1 this week, making it officially a penny stock.
I’ve had my eye on this business for a while as a potential buy for my ISA portfolio. I reckon it’s a good business at a reasonable price. On a medium-term view, I think an investment at under 100p could deliver good results.
Quality brands
The company in question is premium brick manufacturer Michelmersh Brick Holdings (LSE: MBH).
With a market cap of just under £95m at the time of writing, this stock definitely falls into the small-cap bucket. However, this modest valuation hides some upmarket attractions.
Making bricks doesn’t sound all that glamourous. But not all bricks are equal. Michelmersh operates near the top of the market. It owns a portfolio of “seven market-leading premium brands”, each of which has a distinctive look.
Names such as Blockleys, Carlton, and Freshfields feature in the company’s ranges. Property developers specify bricks like these for upmarket residential and commercial developments. They don’t want to use cheaper generic bricks, which might spoil the look of these buildings.
Having differentiated products gives a company pricing power – an essential ingredient for a quality business.
What about the housing slowdown?
It’s no secret that UK housebuilders do not expect to build as many houses this year as they have in recent years.
Michelmersh’s half-year results reflect this weakness. The company’s sales fell by 16% to £35.4m during the first half of 2024, while adjusted pre-tax profit dropped 22% to £5.3m.
Management previously expected a stronger performance during the second half of the year, but they now say this is unlikely.
This downbeat guidance has led brokers covering the stock to slash their profit estimates. Broker earnings forecasts for 2024 have been cut by around 25% to around 7.8p per share.
Is it really the right time to buy?
Obviously, there’s some risk things will get worse before they improve. But I’m not looking at Michelmersh as a quick punt.
I see this as a good quality, long-term investment. On that basis, I reckon the shares look good value right now.
Based on the latest forecasts, the shares trade on about 12 times 2024 forecast earnings. This falls to a modest multiple of 10 times forecast earnings for 2025.
Importantly, the forecast dividend yield of 4.8% remains comfortably covered by expected earnings. There’s cash backing on the balance sheet, too. Michelmersh’s balance sheet shows net cash of £4.1m and no debt at the end of June 2024.
What I’m doing
Analysts covering Michelmersh have an average target price of just over 150p. That would be equivalent to a 50% share price gain from current levels.
My own number crunching suggests a similar target price for the shares. When the UK property market picks up a bit, I’d expect Michelmersh to recover too.
Reassuringly, management say new orders are strengthening and have reached levels not seen since 2022.
I’d be happy to buy Michelmersh today. The only problem is that to make room in my portfolio for a new stock, I need to sell something else.
I haven’t yet decided what I’m going to do, but Michelmersh remains on my short list of possible buys.
