Shares of Michelmersh Brick Holdings (LSE:MBH) have fallen 17% since July. This fall gives the premium brickmaker an £86m market cap and share price of 95p, putting it back into penny stock territory.
Challenging times
Michelmersh owns a wide portfolio of bricks brands, including most of the UK’s premium ones. It produces over 120m clay bricks and pavers every year.
As one can imagine, the company is operating in a tough market. On 2 September, we saw this in its half-year results.
While revenue edged 1.1% higher to £35.8m, gross margins narrowed to 33.6% from 36.2%, and adjusted earnings per share (EPS) fell 23% to 3.3p per share. These obviously aren’t great numbers.
Chair Tony Morris commented: “The timing uncertainty in the recovery of the wider UK construction industry and Belgium brick markets continues to challenge the Group. UK brick despatches remain circa 25% below the peak in 2022, whilst Belgium is some 40% below over the same period.”
Bright spots
It wasn’t all doom and gloom, however. UK despatch volumes outperformed the wider market, including a 3% increase from the start of the period. This was despite the impact of a two-week shutdown in January at its Carlton site.
Meanwhile, the interim dividend was held steady at 1.6p per share, underlining the board’s “confidence in the outlook of the business”. The forecast dividend yield is currently 5%.
Michelmersh now expects FY25 results to be broadly in line with FY24, with trading momentum improving into H2. So the business is displaying some resilience.
Looking further ahead, the firm anticipates a return to growth in 2026. And it has net cash of £1.5m — and a £20m borrowing facility, if needed — to help it get to that point.
The medium term remains brighter
Of course, the challenges haven’t gone away just yet. High inflation and interest rates continue to blight the UK construction industry, creating tough times for brickmakers like Michelmersh. This backdrop adds risk.
If this year’s earnings come in slightly below last year’s, that puts the stock on a price-to-earnings multiple of around 14. But if the firm’s growth resumes next year and beyond, I think the stock could end up good value.
That’s because over the medium to long term, the growth story still looks intact to me. There’s a critical shortage of new residential and social housing, while there will be ongoing repair and maintenance needed for existing brick façades. And there’s still demand from the replacement of unsafe cladding.
Big price discrepancy
Two brokers are also bullish. On 2 September, both Canaccord Genuity and Berenberg Bank reiterated their Buy ratings on the stock and gave it a 150p price target. This was only slightly lower than their old targets of 160p and 170p, respectively.
While broker targets can end up way off the mark, and should be taken with a degree of scepticism, it’s worth noting that Michelmersh is currently trading 58% beneath this new target.
According to Berenberg, Michelmersh’s profits should grow faster than sales, once demand for bricks picks up. Add in the 5% dividend yield on offer, and this penny stock could be set up to generate attractive future returns.
As such, I reckon it’s a buying opportunity for long-term investors to think about.
