There aren’t many penny shares offering a dividend yield above 5%, but Michelmersh Brick (LSE:MBH) is one of them. The AIM-listed brickmaker’s share price is down 11% year to date and 43% since April 2021.
However, the selling might have gone too far, at least according to the four City analysts following the stock. They have an average share price target of 136p — some 54% above the current 88p. What’s more, all four rate the stock as a Strong Buy.
Challenging backdrop
Michelmersh is a premium brick and building products manufacturer, operating throughout the UK and Belgium. It sells over 100 products into diverse end markets, including repair, maintenance and improvement (RMI), housing, commercial, urban regeneration, and specification. With around 480 acres of land, it has ample clay reserves.
As the chart shows, the share price has been on a disappointing trajectory since 2021. This is directly related to a drop in UK construction, which has been hit by higher interest rates, cost inflation, and weaker demand.
In 2024, UK brick consumption was around 1.7bn units, down from 2.5bn in 2022. And market despatch volumes today are still 25% below 2022 levels.
Unsurprisingly then, Michelmersh’s business has been under pressure. In H1, gross margin weakened to 33.6% from 36.2%, partly as a result of an extended shutdown at one of its UK manufacturing facilities. Adjusted EBITDA fell 18% to £5.9m, despite revenue rising 1.1% to £35.8m.
Management warns that the near-term outlook remains murky in both the UK and Belgium. In fact, the company’s Belgium operation was temporarily shut down in Q3 owing to weak demand.
Valuation and yield
However, the good news is that the market has stabilised, while Michelmersh plans to reopen the Belgium plant in Q4. As such, it sees 2025 broadly matching last year’s £71m in revenue.
Next year, management expects a return to growth. This is backed up by current forecasts for £76m in revenue and a 17% increase in net profit (around £8.5m).
Based on this, the penny share is trading at just under 10 times forecast earnings. As mentioned, it’s also offering a 5.3% dividend yield, with the prospective payout well supported by expected earnings.
In September, the interim dividend was maintained, indicating confidence in the outlook for the business. And though the brickmaker has dropped a commitment to a progressive dividend, it did this to have the flexibility to also carry out share buybacks. In April, it authorised up to £2m to repurchase its own stock.
Supportive trends
Make no mistake, the backdrop for brickmakers remains challenging right now. But the medium to long term looks far brighter, with more than 1m new homes set to be built in the UK over the next few years. Belgium has also acknowledged a need to build many more homes.
Looking ahead, the government has committed to reducing red tape around planning approvals, while new English towns have been proposed. Other factors like high immigration, the rise of single dwellers, and an ageing population all point to the need for more houses.
Management says the business is well positioned to take advantage of any recovery in construction activity. With the stock languishing near a 52-week low, and offering a 5.3% dividend yield, investors might want to take a closer look.
