A relatively short post today, but a stock that's worth a look in the bottom end of the market by value - Michelmersh Brick Holdings. I like them because they make bricks, an industry which quite solidly stands the test of being 'understandable' to me as a humble layperson and because they look like they might be cheap. The graph on the right shows the basis for that assertion - they're trading at a figure well below the value of their net assets. Such a wide discount usually carries a good reason - either the assets are clearly not worth what they're stated at on book, they can't be liberated (for whatever reason), management seem to fritter away cash... something like that.
Wobbly, for a brick maker
Being a brick maker, their revenues and profits should be relatively cyclical. I can't find the exact quote, but I think the figure for market demand was something like -40%; 40% less bricks bought now than 2007. Don't quote me on that, but it seems reasonable, and given the big fixed costs in manufacturing processes like this, demand is relatively elastic and supply relatively inelastic. Basically, they have to suck it up and move on, to an extent.
Their structure has meant it's easy to see the downturn, but slightly harder to see the good times. Big interest bills have meant little left for shareholders in the business, of which the directors are prevalent - about 60% of the outstanding shares are in their hands. Emoluments for them, on the other hand, total to £474k - a significant sum for a business that has lost, in total, about £3m over the last 9 years. It's not a small board, though, and partly the large amount in emoluments in comparison to shareholder profits is just par for the course with small companies. It's easier to stomach if they're growing, though!
The £20m of debt they carry is burdensome, but doesn't look to be too expensive all-in-all, likely because it's secured against the group's sizable property assets.
It's the assets that create the 'diversity' here - the significant amount of land they hold. They're in discussions with Persimmon to buy up some of their surplus land, and other bits are being used as landfill, generating a decent amount of profit and a better than decent cash flow (the major cost is amortisation).
Realistically, though, when a company is trading at this level it's fairly obvious that the actual operating company isn't being valued at very much. I suspect it's a function of the enormous management stakes, too, in that the capital probably could be put to better use - look at returns historically - but is unlikely to be while the current board own most of the company. For their part, they argue that we're just at the down point and that they'll be well positioned when things pick up again, with their juicy landfill operations and the ongoing land sales bringing even more money in.
The most recent management communication wasn't positive - they're looking at breakeven for the whole year. When and if that recovery comes about is the big question, then. Companies trading at big discounts to book value are always interesting, but I'm not sure there's much potential for outsiders investors here - at least on the level I am, without having spoken to management or really drawn much of the group's strategy out. Perhaps they have a plan that I'm missing. To me, though, it just looks like a huge chunk of assets earning a terrible return and no easy way of remedying it.
Filed Under: Value Investing,