Premium Brick Demand And Decarbonisation Initiatives Will Support Strong Long Term Prospects

Catalysts

About Michelmersh Brick Holdings

Michelmersh Brick Holdings manufactures premium bricks and prefabricated brick products for housing, commercial and repair, maintenance and improvement markets across the U.K. and Belgium.

What are the underlying business or industry changes driving this perspective?

• Chronic undersupply of new homes in both the U.K. and Belgium, with actual build rates well below stated government targets, positions Michelmersh to benefit disproportionately when planning reforms and housing initiatives convert into higher brick dispatches, supporting sustained revenue growth.
• Completion of a multi year capital investment cycle at sites such as Carlton, Michelmersh and Floren, combined with inventory already on the ground, should allow the group to capture incremental demand without matching cost growth, improving operational leverage and lifting EBITDA margins as volumes normalize.
• Stronger policy and societal focus on the quality and appearance of the built environment, including new towns and high quality facades, plays to Michelmersh premium aesthetic portfolio and broad specification range, supporting pricing power and mix led improvement in average selling prices and gross margins.
• Ongoing decarbonisation initiatives, including solar roll out and kiln efficiency projects informed by better data, are likely to reduce unit energy consumption over time, softening the impact of wage and utility inflation on cost of goods sold and supporting net margin resilience.
• Integration and commercial scaling of the FabSpeed prefabricated brick business across all end markets, not just new build, creates higher value add product opportunities and cross selling potential through distributors, which should enhance revenue per unit and support earnings growth once volumes recover.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Michelmersh Brick Holdings's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.5% today to 11.4% in 3 years time.
• Analysts expect earnings to reach £9.2 million (and earnings per share of £0.09) by about December 2028, up from £5.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as £10.3 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 16.9x on those 2028 earnings, up from 14.5x today. This future PE is lower than the current PE for the GB Basic Materials industry at 21.7x.
• Analysts expect the number of shares outstanding to decline by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.13%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The broader U.K. and Belgian brick markets remain around 25% below 2022 peaks, with dispatches still lagging despite years of underbuilding. If planning reforms or government housing initiatives are delayed or ineffective, structurally lower build rates could cap volume growth and constrain revenue over the long term, limiting the company’s ability to grow earnings.
• Competitive pressures are already forcing “appropriate pricing” to protect order intake in a market where industry inventory is rising by around GBP 10 million per month and imports still account for about 20% of U.K. supply. If this oversupply persists, Michelmersh may have to discount more aggressively, compressing gross margins and ultimately reducing net margins and earnings.
• European operations, particularly Floren, are exposed to weak planning approvals and softer continental demand, leading to plant closures and underutilisation. If the Belgian market stays structurally below its 70,000 new homes target, the business may suffer ongoing volume volatility and subscale economics in Europe, dragging on consolidated revenue and profitability.
• Rising labour costs and ongoing cost of living adjustments, combined with the risk that energy markets become less favourable than expected despite current hedging, could push up the underlying cost base faster than Michelmersh can pass through in pricing, eroding gross margin and limiting growth in EBITDA and net profit over time.
• Large capital investment programmes and elevated inventory on the ground have been justified by expectations of a recovery. If housing demand, London and Southeast high rise activity or RMI work remain subdued for longer than anticipated, the company may face lower asset utilisation, working capital drag and weaker cash generation, constraining future shareholder returns and depressing earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £1.34 for Michelmersh Brick Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £1.5, and the most bearish reporting a price target of just £1.15.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £80.9 million, earnings will come to £9.2 million, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of £0.84, the analyst price target of £1.34 is 37.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.