8 min read

Dividend notes: safe as houses? BKG, MBH (12/09/23)

In this construction-themed update I review recent statements from housebuilder Berkeley Group Holdings (LON:BKG) and Michelmersh Brick Holdings (LON:MBH).
Dividend notes: safe as houses? BKG, MBH (12/09/23)
Image credit: Michelmersh Brick Holdings (Poundbury development, 2022)

Welcome back to my dividend notes. Today's update covers reassuring recent updates from two construction sector businesses (one of which is a customer of the other).

Podcast update: before we get started, I just want to take this opportunity to mention a new podcast service I'm contributing to that may be of interest.

Earlier this month I took part in two new podcasts with my fellow private investors Maynard Paton, Bruce Packard and Mark Simpson.

In the Investor's Roundtable Podcast the four of us covered:

  • Asset manager Liontrust #LIO (which offers an 11% dividend yield at the time of writing);
  • Translation specialist RWS Holdings #RWS (which I recently covered here);
  • Retailer Quiz #QUIZ (which has since issued a profit warning – we discussed some possible warning signs);
  • Vaping distributor Supreme #SUP.

We also spent time discussing our views on share tips, 'finfluencers' and the approaches each of us uses to help find new shares to buy.

Meanwhile, in the September's episode of the Private Investor's Podcast, Maynard and I took an in-depth look at family-controlled property business Mountview Estates #MTVW.

This landlord has a niche business that's supported an unbroken dividend record stretching back more than 40 years.

We considered the pros and cons of Mountview's business model ... and talked about hidden value, family disputes, and the best-buy price we'd pay to buy Mountview shares today.

You can listen to these podcasts – and our other discussions – through the Podcasts for Private Investors service.

Companies covered:

  • Berkeley Group Holdings (LON:BKG) - this reassuring trading statement reiterates previous guidance and confirms my view that Berkeley remains one of the best-run UK housebuilders.
  • Michelmersh Brick Holdings (LON:MBH) - solid half-year numbers reassured me, while an informative half-year results call helped to expand my knowledge of this sector and provided further encouragement.
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These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in my screening results at some point.

As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.

Berkeley Group (BKG)

"Berkeley re-affirms its earnings guidance to deliver pre-tax profits of at least £1.05 billion across the current and next financial years"

I last covered FTSE 100 housebuilder Berkeley Group in June, when it published full-year results. These looked reassuring to me and demonstrated the financial strength and reliable returns I've come to associate with this business.

Last week's trading update covered the four-month period from 1 May to 31 August and contained further reassurance.

Guidance reaffirmed: Berkeley reiterated its previous earnings guidance for pre-tax profit of at least £1.05bn across FY23 and FY24. The only potential note of uncertainty, if I'm being picky, is that this is "likely to be weighted slightly to FY24".

Net cash at the end of October 2023 "will be around £325 million".

Trading commentary: the group competes at the mid-upper end of the market and appears to have managed a fairly resilient sales performance.

Berkeley says that more than 90% of FY24 revenue is already exchanged. Cash due on forward sales is expected to be "around £2 billion at 31 October 2023".

The company says that "enquiries have stayed at similar levels over the last four months". However, the value of underlying private sales reservations is 35% below last year's rate, "reflecting the elevated macro-economic and political volatility".

Pricing is said to remain "resilient" thanks to the "constrained supply of both new-build and second-hand homes to the market".

Build cost inflation is now said to be "at negligible levels".

Market commentary: like several other housebuilders recently, Berkeley used its trading statement to have a dig at the state of the planning system and lack of clear government policy on housebuilding:

"The complexity and protracted nature of the current planning system and lack of clarity surrounding certain regulatory changes affecting our sector, at a time of considerable uncertainty for the UK economy with persistent high inflation and interest rates, continues to deter investment into brownfield regeneration and the wider housebuilding sector. "

Berkeley says it has not acquired any new land so far in the current financial year and will only invest "very selectively" in new opportunities.

Dividend/buybacks: the company says it's on track to deliver the next annual shareholder return of £282.7m (266p per share) by 30 September 2024.

However, this will be through a combination of buybacks and dividends – with only 66p guaranteed to be through dividends (equivalent to a 1.6% yield at current levels).

My view

Management say they remain focused on delivering a "sustained pre-tax return on equity of 15% through the cycle".

Berkeley's track record of timing market cycles is better than many of its rivals. I rate the firm highly and always take note of the company's commentary on market conditions.

This business has achieved a post-2009 average return on equity of just under 20%, according to SharePad. Meanwhile, the shares are trading on less than 10x 10-year average earnings with a trailing free cash flow yield of 10%.

I think Berkeley shares look reasonably priced at the moment. My only reservation is that while shareholder returns remain generous, the dividend yield could be quite low, depending on the split between buybacks and dividends.

I prefer dividends, but I do recognise that if a business is genuinely trading cheaply with surplus cash, buybacks can provide superior results for shareholders. This could apply here, in my view.

Incidentally, my fellow private investor and Stockopedia co-writer Graham Neary is a big fan of buybacks. He says he often prefers them to dividends – something he explains in this new podcast (below). It's a good listen with some great insight and ideas – I think it's well worth a few minutes of your time:

Michelmersh Brick Holdings (MBH)

"on track to meet full year expectations"

AIM-listed Michelmersh specialises in producing premium bricks and related products under a range of brands. Upmarket housebuilder Berkeley – above – is said to be a customer, but Michelmersh says it doesn't generally sell to cheaper mass-market builders.

This premium positioning helps to differentiate Michelmersh. I suspect it could support the group's trading over the coming months.

Michelmersh's issued half-year results on 5 September, but the company held a call for retail investors on the Investor Meet Company platform on the 8th, which I listened into.

I found this filled in some of the gaps in my knowledge of the business and confirmed my favourable view of management – co-CEOs Peter Sharp and Frank Hanna are both clearly very experienced in this sector.

I've included some of my notes from the call below, but first, here's a quick summary of Michelmersh's half-year results.

H1 financial highlights: the company describes a "resilient performance" in H1. I think that's a fair description, based on the numbers. Although higher costs did have an impact on margins, profitability remains within historical norms and is now expected to have stabilised.

  • Revenue up by 23.5% to £42.0m (+10.3% organic, plus acquisition contribution)
  • Operating profit up 7% to £6.1m
  • Operating margin: 14.5% (H1 2022: 16.7%)
  • Earnings per share up 7.8% to 5.0p
  • Net cash up 19% to £11.8m
  • Interim dividend up 15.4% to 1.5p per share

My sums suggest a trailing 12-month operating margin of 15.7%, with a return on capital employed of just over 11%. Those seem respectable numbers to me, for a fairly capital and energy-intensive sector.

Outlook: guidance for the full-year was unchanged. Consensus forecasts suggest earnings of 10.1p per share, with a 4.3p per share dividend. That puts Michelmersh on a P/E of nine, with a 4.8% yield.

That looks pretty reasonable to me, given the apparently stable outlook.

Interim results presentation notes: I've included below a selection of notes I made on the IMC presentation. These were mostly points that helped flesh out my understanding of the business and the brick sector.

These notes were made as I was listening to the call, so may contain errors – please DYOR. The presentation is available for replay on the IMC platform for anyone who is interested (free registration). My comments in italics.

  • Michelmersh generally aims to hedge 90% of energy costs over the year ahead
  • The company stuck to its planned schedule of price increases last year, giving customers confidence and clear visibility; mgt believe this aided order intake
  • Tangible net assets are revalued every year, so the fixed assets listed on the balance sheet should be realistic – the latest balance sheet shows a tangible net asset value of £65m, versus a market cap of £84m.
  • UK brick stocks reached a five-year high of 475m in June – a sign of easing demand? For context, 2.5bn bricks are said to be equivalent to c.200k housing starts.
  • Management say the UK has seen a 30% contraction in construction activity since the end of the year.
  • Most UK brick manufacturing capacity is for wire cut bricks, including new capacity coming on stream (e.g. Ibstock, Forterra)
  • Brick imports have fallen from 21% to 18% of UK market share this year - but UK manufacturers have limited ability to meet demand for stock bricks (soft mud, made in moulds). The shortfall tends to be imported from BE/NL, so imports are likely to persist even in a construction slump – I hadn't previously realised this, I assumed imports would dry up and domestic supply would be preferred, but this appears to be incorrect.
  • Michelmersh benefits from import demand as it owns the Floren business in Belgium, which exports c.45% of production to the UK
  • Focus on "medium to upper end" of housing market means that mortgage problems affecting mass-market housing aren't having the same impact on Michelmersh customers/end buyers.
  • Re. bad debt risk from contractors failing: Michelmersh sells through distributors, not direct to developers. Credit insures all accounts, very tight control on receivables - quotes from co-CEO Frank Hanna:
"insuring to the hilt"
"very good at collecting our cash"
  • Hanna also said that he thinks the RAAC concrete problems could end up being "a Grenfell-type issue", potentially creating medium-term opportunities for brick suppliers.

My view

I often find that listening to company presentations is a good way to flesh out my knowledge of a company/sector and gain some insight into its management. With so many presentations now available online (plus transcripts and slide sets), this is much easier for private investors than it used to be.

I already had a positive view on Michelmersh, but the presentation strengthened this and provided some useful additional understanding of the UK brick market.

Despite this, it's worth pointing out that a construction materials firm isn't without risk at this stage in the cycle. In my view, this business is also unlikely ever to become a compounder, due to the capital intensity of its operations.

However, Michelmersh has a strong balance sheet and its shares look reasonably priced to me. I also have a positive impression of management.

I can see plenty to like here.

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Disclosure: Roland owned shares in Kitwave at the time of publication.

Disclaimer: This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations.

You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated.