UK Edition
Questor: buy this well-run brick firm – and get fantastically valuable land thrown in for nothing
If you were looking for the perfect long-term wealth preservation vehicle, it’s unlikely that you would alight on a brick manufacturer. But beyond the day-to-day business of Michelmersh, Britain’s 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 Britain’s 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 company’s real estate assets, it’s 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 company’s 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 Michelmersh’s land so valuable.
“These shares should at least keep pace with rising house prices,” he said.
One worry for shareholders is how Michelmersh chooses to spend the proceeds of its land sales.
“The one thing that could stop this story from working would be the firm buying new assets at the wrong price in this deeply cyclical business,” Mr Davidson said.
“However, so far it has done well – the recent purchase of a specialist brick maker in Barnsley was a fantastic acquisition.”
Questor says: buy
Ticker: MBH
Share price at close: 79p