If you were looking for the perfect long-term wealth preservation vehicle, its unlikely that you would alight on a brick manufacturer. But beyond the day-to-day business of Michelmersh, Britains fourth largest, lies a fascinating story of hidden value.
To understand why, we need to appreciate the life cycle of a typical brick factory. They are normally built on the site of clay deposits, the principal raw material, and have long lives of perhaps 30 years.
Then, when the clay deposits are exhausted, the factory closes and the owner is left with a large hole in the ground. These holes, it turns out, can be extremely valuable.
To start with they are normally used as landfill sites. Then, once filled with refuse, they can be built over with housing. Given how large the claypits are one site sold by Michelmersh earlier this year, in Chesham in Buckinghamshire, covered 25 acres there is scope to build housing developments of considerable size.
Thanks to Britains chronic housing shortage and the consequent high value of development land, a former brickworks can be a hugely valuable asset.
It may seem strange, therefore, that Michelmersh is valued by the stock market as if it were solely a brick maker, with no scope to sell on its assets at highly attractive prices when they become redundant. In fact, the market valuation seems cheap even if the company is seen purely as a brick business.
Investors never make money if they buy at the wrong price, no matter how good the company, said Django Davidson of Hosking Partners, the asset management firm, which owns a 20pc stake in the brick maker. But Michelmersh is a very cheap company, with the shares trading on single-figure multiples of earnings.
He said the firm had more than 300 acres of clay deposits at various stages of the planning cycle. Development land in the Home Counties is worth about £1m-£1.5m an acre. If the company were able to sell half of its land at that kind of price, it would be worth perhaps £150m over the next 20 years, he added.
Michelmersh, which is listed on Aim, is currently valued by the stock market at just £69.8m. Better still, the value of the land is likely to be even higher by the time it is sold, Mr Davidson said. The value of this land will not stay fixed. We do not build enough houses in Britain, so the price of houses and therefore of land will go up.
Despite the compelling story about the companys real estate assets, its important not to forget the qualities of the brick business itself.
Many brick factories have closed in recent years, roughly halving the supply in Britain. Demand for property, of course, remains strong and bricks account for a negligible proportion of the cost of a new home, so price rises should not be strongly resisted by house builders.
There is a long-term runway for the price of bricks to increase, Mr Davidson said. The UK brick market is very attractive.
Of the major brick makers, Michelmersh is the only one to be virtually debt-free yet is the most cheaply valued relative to its sales, he added.
Another of the companys attractions is its management team.
Michelmersh is run by a stable team of its founders, Mr Davidson said. The founders and managers own about 40pc of the company and this ownership structure allows them to invest for the long term. In some ways the firm resembles a family-run private company even though it is listed and such firms tend to outperform massively in the long run.
As a result, he said the stock could make a great investment for older people who wanted to leave assets to their children or grandchildren, especially as these younger generations were likely to face problems buying property as a result of the same factors that made Michelmershs land so valuable.
These shares should at least keep pace with rising house prices
Yes Geminic, I just read part of the article but can't read it all as I don't subscribe to The Telegraph either but the essence is that the land/quarries which Michelmersh owns are worth a significant amount relative to the company's market cap. My comment on this board on 27th March suggested that the share price was perhaps a bit stronger than you might expect from the admittedly good financial performance so this may be the reason why.
I am confident that the company will continue to prosper as long as there is a reasonable amount of building activity in the UK so whether to sell might depend on your outlook for building activity. As far I can tell, there does not appear to be much reduction in building activity despite the softening of house prices.
They may just fall back some what when the generous dividend is paid at the end of the month. The rise has been very good, but may not be sustainable. I would sell soon at maybe 82p if you are lucky. Profit is always very nice.
I am wondering at what point to sell these. The company has a rock solid balance sheet is making good profits and is still on a reasonable multiple of EV after the net cash is taken into account. I'm already 50% up on my purchase and am thinking 90p-£1 may be a good exit point.
Very pleased by the strength of the share price following the recent results and I can understand this because of the quality of the company. However, if this continues for much longer on no additional news I might begin to wonder if some corporate activity might be in the pipeline. I note that the chairman, who is also one of the founders, will be retiring soon.
Yes, you were right city watcher, at the time of writing the share price is up 7.42% on the back of pleasing results. Dividends speak louder than words and the large increase in dividend confirms management assertions that the company is now in a strong position from both an operating and financial viewpoint.
If you search on google there are lots of Articles re the above, accompanied by some comment re the UK brick market issued by Bain, the Private equity Company that bought the Company from CRH in December. Ibstock is the UK's largest brick producer and was previously quoted on the LSE before being bought by CRH. Quotes in the press include the expected continuing shortage of UK brick supply and growing imports from Europe, prices still hardening, no recent "significant" investment (other than Ibstock) in expanding UK production. Michelmersh's modest expenditure presumably viewed as being no worth mentioning!
Obviously Bain is trying to secure the maximum price it's shares, but the info being put out currently should do no harm for Michelmersh's share price. If the info being put out is actually true, the share price may deserve to be higher on a fundamental view. If Ibsock is successfully quoted it's PE may affect that of MBH.
Important message from the Financial Conduct Authority:
Posting inside information that is not public knowledge, or information that is false or misleading, may constitute market abuse.
This could lead to an unlimited fine and up to seven years in prison.
If you have any information, concerns or queries about market abuse, click here.
The content of the messages posted represents the opinions of the author, and does not represent the opinions of Interactive Investor Trading Limited or its affiliates and has not been approved or issued by Interactive Investor Trading Limited.
You should be aware that the other participants of the above discussion group are strangers to you and may make statements which may be misleading, deceptive or wrong.
Please remember that the value of investments or income from them may go down as well as up and that the past performance of an investment is not a guide to its performance in the future.
The discussion boards on this site are intended to be an information sharing forum and is not intended to address your particular requirements.
Whilst information provided on them can help with your investment research you need to consider carefully whether you should make (or refraining from making) investment or other decisions based on what you see without doing further research on investments you are interested in.
Participating in this forum cannot be a substitute for obtaining advice from an appropriate expert independent adviser who takes into account your circumstances and specific investment needs in selected investments that are appropriate for you.