Brickability Group has solid foundations

Brickability has the financial firepower to make it through the crisis and come out stronger at the other end, writes Mark Watson-Mitchell. 

At a time when housebuilding sites and construction companies are in limbo you might well be wondering why I am about to profile Brickability Group (LON:BRCK).

Although it is a major supplier to the industry, it has already made some decisive moves and it has hunkered down in reaction.

It only floated on AIM in late August 2019. At that time, it was valued at £149.8m, with 87.3m of its new shares placed at 65p each, raising a net £53.7m for the company.

It is a classic example of a ‘buy to build’ combination of successful individual businesses pooled into one cohesive structure aimed at maximising both revenue and growth.

The group’s businesses are centred into three core product areas: bricks and building materials, roofing products and services, and also heating, plumbing and joinery.

The company is a market-leading supplier of facing bricks, blocks, rainscreen cladding systems, architectural masonry, paving, roof tiles and slates to the construction industry.

It supplies over 300m bricks annually and has 25 sites and sales offices, employing approximately 225 people throughout the UK.

Over the last 25 years it has built up an excellent relationship with both its customers and its suppliers.

It is that relationship which is helping to withstand any pressures that the group may well have been facing or could be facing in the near future.

In the last week of March, it published an update on both its trading and the Covid19 impact. It had already endured the inertia in its market pre-General Election, then experienced sites being closed by the floods – then along comes a nasty bug.

Trading up to its March year-end was in line with expectations.

However, the impact of the virus prompted the group to decide to close its sites and ask those members of staff that could work from home to do just that, sufficient to provide support to its customers and suppliers during the limbo period.

For the year to end-March 2020 it is expected that the group will have seen its sales rise from £163m to £190m, while adjusted pre-tax profits could have leapt from £12.5m to £17.5m, giving a near 50% jump in earnings from 4.2p to 6.2p per share.

Those earnings more than twice cover the expected dividend of 2.3p per share.

Understandably all guidance for the current year, now underway, has been withheld.

However, previous estimates were for £198m of sales this year and £207m next year, with pre-tax profits estimated at £20.9m and £23.3m respectively.

Just how long this ‘lockdown’ will continue for and how drastic its effect is, of course, unknown.

At the same time as closing its sites it also, without financial obligation, ceased taking deliveries from its key brick manufacturers.

What we do know, and this gives a very firm underbelly for this profile feature, is that the group is carrying very low levels of stock and it has a strong balance sheet with £22m of cash on hand.

Earlier this year it refinanced its revolving credit line with HSBC of up to £35m, of which £25m has already been drawn down, the balance £10m undrawn will be sufficient to help fund the group through the limbo.

It has a gross monthly ‘burn rate’ of around £1.5m, of which £1m a month is staff costs, so that may well see some benefit from the Government’s Support measures.

The group has 230.5m shares in issue, of which the Management hold 56.6% of the equity. Other large holders include Promethean UK Opportunities Fund (12.6%), Liontrust Asset Management (9.0%), Blackrock Investment Management (UK) (4.6%), and Soros FM UK Management (4.0%).

The group’s shares, now 39p valuing it at £90m, have an estimated 35p net asset value and are trading at just 6.3 times historic earnings.

Eventually, the impact will diminish, sites will return to work and deliveries will be resumed – so too will be the progress of the Brickability Group.

I now set an end-2020 target price of 55p.