How To Cash In On Holes In The Ground by Finance News Bulletin

Published: 04/12/07

Michelmersh Brick (LSE: MBH) -- appreciated by the market at £47m -- does what it says on the container, making one of the main raw resources for the construction industryBut the genuine action for investors comes after the clay has been dug and the brick creation done and dusted That's because the corporation is set to make a mint from its holes in the ground -- by selling off its surplus land for house buildingAIM-quoted Michelmersh looks contemptible at the moment, trading just in line with mesh asset value

And this is set to rise substantially over the next few existence as the benefits from the development programme flow through into the company's treasury, with the balance sheet becoming debt free in 2008The basic business, though, is developed clay bricks, roof strips and paving slabs Michelmersh has 3% of the UK marketplace by volume, but 5% by value due to concentration on specialist products It has also recently finished a £15m place modernisation programme

You would have expected, at least at some stage of the Noughties' home building bonanza, to have seen a bounce in element pricesBut no, according to Michelmersh, the cost of what is still regarded as the builder's typical cornerstone material has gone up

not a lotAnd now that the new-build boom is on the back burner as the possessions market hits trouble, surely hopes of a price pick-up are now tart in the skyNot that simple, says the company Nobody else has worried to invest in brick making capacity for quite a extended time because returns haven't precisely been stellar

So now it's decision time for the big manufacturing players who control over 90% of the UK market: do they stay in the business and splatter out the essential cash, or head for the hillsThe sector looks mature for corporate activity New investors will want to see improved returns on assets, which would work out well for Michelmersh Either income margins should improve, or the company will get the chance to snaffle some extra production in front of the next house structure upswing

Indeed, Michelmersh has already benefited from some industry re-shuffling, by acquiring a 23% stake in competitor Baggeridge which was then knocked out to main player Wienerberger at a handy 15% incomeLooking at landfill, Michelmersh has three sites with accepted waste management licences which are ready to provide useful cash run for years to comeHowever, it's the development possible that gets the pulses racing The company owns 80 acres of land in Telford on which an alternative agreement has been signed with the UK's next biggest home builder Persimmon (LSE: PSN) , for phased housing development

The 80 acres are in the Michelmersh books at £11m For the first 15 acres £10m is due to be received in near the beginning 2008, which will clear the company's balance sheet of debt And detailed preparation consent for the remaining 65 acres is being obtained, ready for the rest of the ground being sold in several tranches as the soil is workedThere are allowances available for offsetting Capital Gains duty and the company doesn't wait for to pay any tax until 2009 at the earliest

Earnings-wise, the basic numbers aren't too thrilling exclusive of property gains, the shares are on a PER of 20x and 1% yield Yet although improved margins are on the cards, the Michelmersh Brick tale isn't really about bricks It's about the development possibilities of the company's land bank, chiefly when new home building resumes in earnest

As that could be several months, if not years absent, I believe that Michelmersh falls into the security device away' category Don't expect immediate performance, but with low downside risk and on a two to three year view, the shares are likely to be value significantly more than today's 1175pMichelmersh element has been discussed several times on our Paulypilot's inn discussion board including this thread

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