Given it lowered market expectations in October the full-year results from specialist brick maker Michelmersh Brick Holdings Plc (LON:MBH) in March came as a pleasant surprise.
In particular, the doubling of the dividend was testament to the group’s confidence in long term growth prospects.
Long story short, it has the cash to grow operations, despite current negative market trends.
A solid performance against a difficult backdrop
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.
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 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..
Meanwhile, changes in the materials market meant it had to re-source carbon additives used in brick manufacturing at its Freshfield Lane facility in Haywards Heath - one of its four plants.
Operational issues at its Michelmersh site reported at the half year stage, linked to the kiln, have been addressed, enabling the site to move back to full operational capacity.
Replacing the kiln cost the company £1mln but will increase yields and is just one example of the company ploughing profits back into the business as it seeks to eliminate energy and labour inefficient processes.
"We want to be a long term, sustainable, dividend bearing share and we will be doing that and utilising the cash to improve operations," Frank Hanna, joint chief executive, said. That would include enhancing efficiencies and improving products.
Drivers in housing market intact
Hanna told Proactive 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.
The EU referendum vote has undoubtedly muddied the waters, but one benefit of the softer pound was that fewer foreign-made bricks are being imported to the UK.
More bricks despatched despite a dip in output
The company's output eased 1.3% year-on-year in 2016 in an industry where UK producers made 7% fewer bricks and imports fell.
Despite the decline in output, the group despatched 69.4mln bricks, up 4% on 2015.
The products were delivered into the group's usual sector mix of Repairs, Maintenance & Improvements (RMI), new homes, quality urban regeneration and specification projects. RMI remained steady and strong for the group throughout 2016, Michelmersh said.
With five leading brands (Blockleys, Charnwood, Freshfield Lane, Michelmersh and Hathern Terra Cotta), the group's product is targeted at the premium sectors.
It may not pile 'em high and sell 'em cheap, but it still produces around 70mln clay bricks, tiles and paving stones a year. That total is set to rise above 100mln with the acquisition of regional brick manufacturer Carlton Main Brickworks for a net consideration of £31.2mln.
The group also includes a landfill operator, New Acres Limited based in Telford (Shropshire).
New Acres seeks to develop future landfill and development opportunities on ancillary land assets.
Using odd bits of land scattered around town is all the rage at the moment, and Michelmersh has that covered, selling surplus land to house builders.
Ancient history, long future
The history of brick making goes back millennia, and although Michelmersh is often called upon to contribute to projects, such as London's St Pancras station, where new additions need to be constructed in keeping with the style of the older surrounding business, this is no stick-in-the-mud company, as evidenced by the introduction in 2015 of packaging robots at its Blockleys facility in Telford, Shropshire.
Developments such as these, and the expansion of the Freshfields Lane site in West Sussex, were achieved for relatively modest outlays but lay capacity and efficiency foundations for future periods.
“The UK construction sector is facing continued demands to provide increased residential output to meet the housing shortage. This will support demand for bricks alongside other products and the short and medium term prospects for our industry encourage investment. The board will continue to evaluate industry opportunities as they arise,” Michelmersh said in its 2016 results statement.
Taking on debt to acquire Carlton
Up until the acquisition of Yorkshire-based Carlton, the company was debt free, but that is set to change, with the acquisition being financed through a mixture of new facilities provided by HSBC and Michelmersh’s own cash balances; the board is also anticipating proceeds from the completion of the sale of the Dunton landfill site shortly.
The new facilities being provided by HSBC comprise a £20mln term loan, a £6mln revolving credit facility and a £1mln overdraft facility. For a company valued at just under £60mln and with annual revenue of £30mln, that level of debt does not seem particularly onerous.
As part of the consideration, Michelmersh will issue 4.7mln ordinary shares to the sellers at an assumed price of 72p a share. The shares rose a penny to 73p on news of the acquisition, putting the shares on an earnings multiple of around 16.8.