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Michelmersh Brick Holdings Plc: THE INVESTMENT CASE

Michelmersh Brick scaling up and branching out regionally

If you'll forgive the obvious pun, the acquisition of Carlton Main Brickworks is a major building block in Michelmersh's plans to dominate the premium end of the brick market
House built using Michelmersh bricks
INVESTMENT OVERVIEW: MBH The Big Picture
Britain needs to build more houses

The acquisition of Carlton Main Brickworks by Michelmersh Brick Holdings Plc (LON:MBH) is set to move the specialist brick maker into a different league.

If you’ll forgive the obvious pun, it is the next building block in the development of a company that has augmented organic growth with carefully chosen acquisitions.

In the case of Carlton, it was the last independent brick maker in the UK of a size to make any sort of significant impact on Michelmersh’s operations.

How significant? Let us count the ways.

Carlton is expected to increase Michelmersh's output to more than 100mln bricks a year, which represents a projected increase in excess of 40% on Michelmersh's current output.

The acquisition will give Michelmersh access to new regional markets, opening up cross-selling opportunities in the north-east of England.

Speaking to Proactive Investors, joint chief executive officer Frank Hanna, possibly betrays himself as a secret fan of the comedy show ‘League of Gentleman’ when he speaks of “local bricks for local markets” an reveals that the vast majority of buildings are built with bricks sourced from plants no more than 60 or 70 miles away.

The Carlton business is profitable, and brings with it a dedicated workforce.

In the 12 months ended 31 March 2016, Carlton made an audited profit before taxation of £2.62mln on turnover of £13.1 million, which represents unaudited adjusted underlying earnings (EBITDA) of £5.56 million after adding non-recurring expenses.

To give that some context, in 2016 Michelmersh’s revenue rose to £30.06mln from £29.07mln the year before, while profit before tax edged up to £4.57mln from £4.56mln.

All of which begs the question, why did Carlton’s management sell up?

“I think it was a succession planning issue,” Hanna suggested. “They also saw the business benefits of being part of Michelmersh.

“We’ve been in discussions with Carlton for some time as we recognised it as a quality asset that fits with our core premium segment,” Hanna said.

The acquisition does mean the company has taken on debt, and not long, either, after it doubled its dividend.

Cash balances at the end of 2016 stood at £4.7mln, up from £2.9mln the year before, so the business is capable of throwing off cash, and as such taking on a £20mln term loan from HSBC that will supplement a £6mln revolving credit facility and a £1mln overdraft facility does not seem reckless.

Besides which, the acquisition is expected to be significantly earnings enhancing in the current financial year and increase the overall operational cash flow of the company, plus the company has recently pocketed £2.68mln in cash from the sale of the former Dunton Brothers brickworks at Chesham in Buckinghamshire.

The UK is not building enough houses

The UK brick market experienced falling output in 2016 and average selling prices deteriorated, affecting the group's ability to make the expected pricing gains in the second half of the year.

On the plus side, average selling prices were maintained across the group, despite the dilution caused by increased sales of lower priced products..

Even so, some might question whether now is the right time to be expanding at such a lick, but Hanna believes the fundamental drivers of the housing market remain intact, such as increased population, and a lack of affordable homes, though home building is still lagging behind government targets.

“We’re not building enough houses in the UK,” he says, and you’d be hard pressed to find a single person who disagrees with him – including the government officials responsible for ensuring that we are building enough houses.

Perhaps the tragic events of the Grenfell Tower disaster will bring about a change in attitude, both in terms of the number of houses that are built, and the type of housing.

Hanna says anecdotal evidence suggests local authorities are still selling more houses than they are building, and it may be that public opinion towards social housing is changing in favour of a greater effort to address the shortage of homes.

Still too early to gauge the effects of Brexit

The EU referendum vote has undoubtedly muddied the waters, but one benefit of the softer pound is that fewer foreign-made bricks are being imported to the UK.

“Nearly all bricks used in the UK are made in the UK,” Hannah declared.

“While there is, and always has been, a proportion of imported products, the recent fall in sterling has made these products more expensive and recently brought an increased focused on UK-manufactured products as one of the most cost-effective solutions.”

One possible impact of Britain’s decision to exit the European Union could be a shortage of bricklayers or, as Hanna observers, a shortage of bricklayers prepared to work for the sort of rates builders are willing to play.

He points out that the UK brick industry is doing its bit to train up the next generation of brickies.

“University is not for everyone,” he notes.

For its part, Michelmersh has built up a substantial history of support for Brooklands College, a further education college on the outskirts of south-west London, over recent years, including the donation of thousands of brick and clay products, professional bricklaying equipment and tools.

It has offered technical continued professional development assistance and bespoke factory tours to give the students further in-depth insight into the industry.

Clearly, the company is thinking long term about the industry, and why not given that it is an industry that has been around for millennia?

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Michelmersh Brick Holdings Plc Timeline

Newswire
January 16 2017

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If you'll forgive the obvious pun, the acquisition of Carlton Main Brickworks is a major building block in Michelmersh's plans to dominate the premium end of the brick market
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