Michelmersh Brick Holdings Plc - Half Year Results for the six months ended 30 June 2019

Financial Highlights

 

 

30 June 2019

30 June  2018

Change

 

Turnover

 

        £27.2m

        £23.1m

+ 17.4%

 

Underlying1 gross margin

41.9%

40.5%

+ 1.4%

 

Underlying1 EBITDA*

 

          £6.6m

          £5.6m

+ 18.0%

 

Underlying1 operating profit

          £5.4m

           £4.7m

+ 15.5%

 

Reported PBT

 

£4.0m

£2.9m

+41.0%

 

Underlying1 PBT

 

          £5.2m

          £4.4m

+ 18.3%

 

Reported Basic EPS

 

3.36p

2.55p

+31.7%

 

Underlying1 EPS

 

            4.55p

            4.20 p

+ 8.3%

 

Interim Dividend

          1.15p

             1.06p

+8.5%

 

Cash from operations

          £6.1m

£2.7 m

+ 130.1%

 

 

Operational Highlights:

·      Financial performance above expectations

·      Strong financial performance from UK operations

·      Acquisition and integration of the Belgian business

·      Strong balanced forward order book going into H2, 7% ahead of the same period last year. (Note this excludes Floren.be forward orders and is on a like for like basis)

·      Completion of phase 1 of the Carlton investment project targeting enhanced efficiency and output

·      Investment in IT CRM and HR infrastructures

·      Increased interim dividend

 

Commenting on the results, Martin Warner, Chairman of Michelmersh Brick Holdings Plc, said:

"Following a very strong first half in 2019, and with a robust order book, Michelmersh can look forward to steady trading for the remainder of the year. Stocks across the industry remain at historically low levels and the volume of imported products are increasing.

The Group's performance in the first half of 2019 has continued into the second half and, with the positive backdrop to our markets, the Board expects to exceed market expectations for the full year. "

 

* EBITDA is defined as earnings before interest, tax, depreciation and amortisation..

1 References to 'underlying' excludes items classed as exceptional and amortisation of intangibles

 

Chairman's Statement

 

I am pleased to be reporting on another positive set of results for Michelmersh, which includes a maiden contribution from our new Belgian subsidiary, Floren et Cie ("Floren") from the date of its acquisition. The acquisition demonstrates the Board's ambition and ability to continue the operational expansion of the Group. Since being acquired on 15 February 2019, Floren has performed to expectations and been integrated into the wider Group structure. We welcome the new team to the Group and thank them for their efforts in the integration process and look forward to progressing together.

Financial Highlights

 

 

30 June 2019

30 June  2018

Change

 

Turnover

 

        £27.2m

        £23.1m

+ 17.4%

 

Underlying1 gross margin

41.9%

40.5%

+ 1.4%

 

Underlying* EBITDA2

 

          £6.6m

          £5.6m

+ 18.0 %

 

Underlying* EBIT

          £5.4m 

           £4.7m

+ 15.5%

 

Reported PBT

 

£4.0m

£2.9m

+41.0%

 

Underlying* PBT

 

          £5.2m

          £4.4m

+ 18.3%

 

Reported Basic EPS

 

3.36p

2.55p

+31.7%

 

Underlying* EPS

 

            4.55p

            4.20p

+ 8.3%

 

Interim Dividend

          1.15p

             1.06p

+8.5%

 

Cash from operations

          £6.1m

£2.7 m

+ 130.1%

 

 

1Underlying gross margin is calculated by adding back £770,000 to the reported gross profit to eradicate the 'fair value' element of brick stock acquired at Floren and adjustment for the impact of IFRS16.

EBITDA is defined as earnings before interest, tax, depreciation and amortisation.

*Items deemed underlying are reconciled with the reported figures in the table Alternative Performance Measures below.

 

Turnover for the six months increased by 17.4% over the equivalent period in 2018, of which like for like turnover for the existing UK business grew by 8.6%. The reported Operating Profit of £4.1 million (2018: £3.2 million) and Profit Before Taxation of £4.0 million (2018: £2.9 million) underlines the Company's continuing success of improving returns from its existing business. These financial results include a number of items that reflect accounting for the acquisition of Floren but make it difficult to extract the underlying trading performance. The table below (Alternative Performance measures) extracts these items and allows a clearer view of the underlying performance, showing a more meaningful increase in all of the main performance indicators.

All of the financial metrics are positive but it should be noted that underlying earnings per share shows an 8.3% improvement over H1 2018 even with a short period of contribution from Floren since acquisition.

The income statement reports a provisional 'Bargain' purchase of Floren of £0.8 million. A Bargain purchase represents the excess of the fair value of the assets and liabilities acquired over the consideration made for the business. The 'fair value' exercise involved external valuation of land and buildings, and an internal evaluation of inventory. An exercise to complete the establishment of fair value of other tangible and intangible assets and consequent deferred tax balances is under way and will be applied in the audited balance sheet as at 31 December 2019. This confirms our view that the earnings-based valuation was supported by the tangible assets being acquired. Further detail of the acquisition is provided in note 4 to this statement. The income statement also records as an exceptional item the costs associated with the acquisition as an expense below Operating profit.

 

 

 

 

 

Alternative Performance measures reconciliation:

 

Six months ended

Six months ended

H1 2019/ H12018

12 months ended

 

31 December 2018

 

 

£000

Reported Operating profit

+28.2%

7,054

Add back exceptional costs of plant restructure a

 

 

930

To remove the 'fair value' element of acquired brick stocks so as to report 'normal' trading terms b

 

 

-

Amortisation of intangibles

 

1,138

IFRS16 impact

 

-

'Underlying' operating profit

5,390

4,668

+ 15.5%

9,122

Finance costs - reported

 

(617)

                         -  exclude IFRS16 charge

 

-

'Underlying' profit before taxation

5,153

4,356

+ 18.3%

8,505

 

 

 

'Underlying' operating profit as above

+ 15.5%

9,122

IFRS16 impact

 

-

Depreciation

 

1,842

Underlying EBITDA

6,617

5,607

+18.0%

10,964

 

 

 

Reported Basic EPS

31.7%

5.78 p

Earnings adjusted by   and  b above

 

930

Earnings adjusted by excluding exceptional 'Bargain Purchase' and Acquisition costs

Amortisation of intangibles

 

 

 

1,138

Underlying Basic EPS

+ 8.3%

6.76 p

 

 

 

 

IFRS 16 Leases

Treatment of plant and vehicle leases are now subject to a different accounting treatment than in prior period with the implementation of IFRS 16. Assets previously held under contract leases are now treated as a fixed asset with an associated lease liability. The effect on these Interim Statements has been to increase tangible fixed assets by £1.3 million, and to recognise a similar amount in long and short term interest bearing liabilities. Monthly rental charges are now replaced with depreciation and interest spread over the period of the lease. The net impact on the Income Statement is a net reduction in profit before taxation of £46,000 but with the charging of interest and depreciation not included in the reported EDITDA, the effect on the six month's EBITDA has been positive by £330,000. The comparative figures have not been restated.

Land and Assets

The Group continues to explore a range of opportunities to enhance and release the value of its land assets. The new road being developed at Telford will commence construction in 2020 as we complete the final preparations and clear planning and legal conditions. This will release substantial in-ground minerals for the brick plant and offer opportunities to release land for sale.

Capital expenditure in H1 has centred around the Telford road project and completing phase 1 of the Carlton plant replacement project. The automation of the kiln unloading process is now complete and evaluation of subsequent phases is under way that hold the opportunity to increase plant capacity and efficiency.

The Floren balance sheet reflects the same structure as the Group; a strong core of tangible fixed assets including significant land holdings and adequate working capital for the business. As a result of the acquisition, the Group's balance sheet has grown. Over the last 12 months, net asset value per share has grown 7.7% to 75 pence.

 

Net Debt and Working Capital

Net debt at 30 June 2019 stood at £15.1 million (30 June 2018: £18.1 million) and as noted above included £1.3 million as a result of the adoption of IFRS 16 in this period. During the first six months of 2019, we have seen some large cash flows relating to the Floren acquisition. Acquisition consideration and associated costs paid out in the period amounted to £8.8 million while the net cash in Floren's balance sheet equated to £700,000 at acquisition and £800,000 at 30 June. To fund the acquisition, the Group drew £5.3 million from existing debt facilities in Euros such that currency fluctuations are less of a risk going forward. Floren now offers some structural currency hedging as it generates currency that meets demands elsewhere in the Group.

Post-acquisition, the Group took advantage of strong investor demand and placed 5.6 million shares at nil discount to generate net proceeds of £4.8 million.

Having also paid £2.5 million in interim and final dividend in respect of 2018 during the last six months, the underlying cash generation of the business is evident in the period end net debt figure. Historically, H2 is a stronger cash generative period than H1 and we expect to further drive down our debt by the year end.

The Board are aware that strong operating cash generation, modest debt levels and comfortable covenants gives the business flexibility to take advantage of opportunities that arise - both the Carlton and Floren acquisitions were made easier by having a strong cash/debt position.  

 

Dividend

Consistent with the Board's stated intentions to provide a meaningful and progressive dividend, we are pleased to report that continued robust trading allows us to declare an interim dividend of 1.15 pence (2018: 1.06 pence). The dividend will be paid on 10 January 2020 to members on the register on 6 December 2019. The Board has revised upwards its guidance on the expected final dividend for 2019, as it maintains its policy of one third of the total annual dividend being paid at the interim stage and two thirds of the total annual dividend being paid at the full year.

The final dividend for 2018 was paid in June 2019 and for the first time, with shareholders having the option to elect for a scrip dividend. I am pleased to note that this facility was selected by a reasonable number of large and smaller shareholders which encourages us to maintain that facility going forwards. Those wishing to take shares in lieu of cash for the interim dividend will have until 17 December to make that election.

 

Outlook

Following a very strong first half in 2019, and with a robust order book, Michelmersh can look forward to steady trading for the remainder of the year. Stocks across the industry remain at historically low levels and the volume of imported products are increasing.

The Group's performance in the first half of 2019 has continued into the second half and, with the positive backdrop to our markets, the Board expects to exceed market expectations for the full year.  

Wider concerns surrounding political uncertainty, potential housebuilding slowdown in the south-east and worldwide economic pressures have yet to have a discernible impact on the brick manufacturing industry. The Directors however maintain a cautious view on these background factors and the effect they may have on brick demand and pricing in the final quarter of the financial year and 2020. Michelmersh continues to operate on the basis of a strong order book, strong loyal customer relationships and continued latent demand from the specification, housing, repair maintenance and improvement and commercial sectors. Our European acquisition has been very positive and has brought with it enormous product flexibility and future growth opportunity.