Michelmersh Brick (LSE: MBH) is of the market’s biggest fallers after releasing a trading update this morning. Has the market overreacted to the news, creating an excellent buying opportunity? Or should investors steer well clear, and look instead to one of its customers — housebuilder Berkeley (LSE: BKG)?
Bricking it
Shares of Michelmersh were dumped like, well, a ton of bricks when the market opened this morning, sending the price crashing almost 20% to 51p.
After a decent performance in a flat market in the first half of the year, the company said today that its “ability to make the previously expected pricing gains in the second half has been impacted by average selling prices not rising to the levels anticipated and increased competition.”
Management warned that it now expects revenue and profit to be “at or around a similar level to that reported for the full year 2015.” That’s to say, £29.1m revenue and £4.6m pre-tax profit versus a current consensus of £31.9m and £5m.
Furthermore, the board added that “falling average selling prices across the market in 2016 suggest there will be little or no recovery in prices at the start of 2017.”
Not all bad news
There were some positives in the trading update. The order book is 5% up from the half-year stage, cost savings have been identified and strong cash flow means cash at the year end is expected to “meet or exceed” the board’s previous expectations.
After today’s fall in the shares, Michelmersh is valued at £33.3m, which is an attractive 31% discount to last reported tangible net assets of £48.1m. The P/E is reasonable at 11.5 and management says it can continue “to reward investors with a steady growth in dividends.”
I think this is a nice little business, which should do well over the long-term, but with earnings looking likely to be subdued for the foreseeable future, potential investors need to decide whether a 2.2% dividend yield is sufficient compensation.
Bargain of the decade?
At a share price of 2,460p, housebuilder Berkeley is on a forecast P/E of just 6.3. Furthermore, at last month’s AGM, the board reaffirmed its intention to pay dividends totalling £10 a share over the next five years, giving an annual yield of 8.1%.
Bargain of the decade or too good to be true? The company’s shares are 25% down from the 3,285p they were trading at just before the EU referendum. This reflects the market’s concern about the potential impact of Brexit on the housebuilding sector generally, but also on Berkeley specifically, because of the company’s focus on London.
Berkeley says forward sales provide good visibility over the next two years, but that it will be tailoring its capital investment into new phases and developments for delivery beyond that “to the market demand.”
What that demand will be remains to be seen, but the earnings and dividend risk appears to be to the downside. Certainly, that’s how the shares are being priced. Berkeley could be a bargain, if the market’s fears turn out to be overly pessimistic. However, it doesn’t always pay to go against the market, and this one is a tough call in my view.
