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Michelmersh divi hike signals confidence in cash generative abilities

The debt-free company doubled the divi and it also has plenty of efficiency-boosting capex projects on the go
Palatial house in Hampshire
Michelmersh operates at the high-quality end of the market

Strong forward order commitments at the specialist brick manufacturer Michelmersh Brick Holdings Plc (LON:MBH) paved the way for a surprise doubling of the dividend.

As it did last year, the company doubled its dividend in its full-year results, hiking it to 2.0p, compared to market expectations of 1.2p.

Cash balances at the end of 2016 stood at £4.7mln, up from £2.9mln the year before, and the board signalled its clear intent to provide shareholders a meaningful return on their investment by announcing its intention to start paying interim dividends.

The dividend for 2016 represents more than 40% of earnings and the plan is to keep up this level of distribution so long as the group is trading favourably.

Speaking to Proactive Investors, joint chief executive Frank Hanna said the company was "very confident of its cash generative abilities" of the business, and that the doubling of the dividend was justifiable reward for Michelmersh's loyal shareholders.

There is a school of thought that says not carrying debt in the current interest rate environement is a failure to 'sweat the balance sheet', as the saying goes, but Hanna opined that "having cash gives the business the ability to breathe".

The group has a number of capital expenditure (capex) programmes on the go, designed to enhance efficiency and improve the product.

Hanna cited the £1mln investment in the kiln at the eponymous Michelmersh plant, which is yielding 99%, as an example of the company using its cash to build a long-term business.

The capex process sounds a bit like a painting the Forth Bridge job, with a succession of plant-by-plant improvements, by which time the first upgrade needs further improvement.

"It's a circular process. We just want to make sure that every pound we are spending enables us to produce more widgets more efficiently," Hanna said.

Investment during 2017 will largely be focused on yield and energy efficiency projects with existing kilns and dryers. The group also plans to undertake an extensive engineering review of its key manufacturing assets to identify further plant maximisation and risk reduction projects.

Revenue in 2016 rose to £30.06mln from £29.07mln the year before, while profit before tax edged up to £4.57mln from £4.56mln.

"The group sits in a well-defined segment of the UK brick sector; our high quality products set technical standards and our service levels are recognised by our customers. We continue to develop the business around our product offering and commitment to our customers," said Eric Gadsen, chairman of Michelmersh, who will be stepping down from the role at this year’s annual general meeting.

“The positive indicators and market fundamentals look set to continue. There is a widely accepted need and publicised government drive for delivering new housing. We believe this backdrop presents significant opportunities for the group in not only new builds, but also in RMI [repair, maintenance and improvements] where we are particularly strong,” said joint chief executives Frank Hanna and Peter Sharp.

“Through the course of the year the market may see brick demand rise to meet current mid-term UK output capacity; however, the significant uncertainties surrounding the impact of Brexit continue to prevail,” Hanna and Sharp said.

Hanna told Proactive Investors that his personal view remains that there is still not enough data, post-Brexit, to accurately assess what the likely medium and long-term effects would be.

"There's lots of uncertainty, but our forward order book is the largest it's been, and we've got good visibility for five or six months, which is important," Hanna told Proactive.

"It's also well balanced across the nation," he added.

The market reacted positively to the update, pushing the shares up 9.8% to 62.85p.


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