Small Talk

July 27, 2014 1:01 pm

UK brickmaker finally climbs price wall

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After five years of grief, things are starting to look up

It takes Michelmersh about 12 weeks to make a brick. That kind of lead time engenders patience.

Martin Warner, boss of the Aim-quoted brickmaker he co-founded in 1997, has had to have patience by the lorryload while the industry, bloated by oversupply, adjusted to the most recent downturn.

But now, after what Mr Warner calls “five years of grief”, things are looking up. Michelmersh, which still makes bricks by hand, last week reported the industry’s first rise in selling prices since 2008.

The news marked a turnround for the Sussex-based company, a decade after it floated on London’s junior market. Interim results showed pre-tax profit recovered to £1.3m from a £300,000 loss last year, on revenues up 13 per cent to £13.6m.

Despite being small, at least in stock market terms, the company has survived where rivals have not. There were 17 main brickmakers in the late 1980s. The UK now has four operators of scale – three of them are foreign-owned.

Michelmersh is upmarket and has just 5 per cent market share. Nonetheless, it is now the only independent UK brick manufacturer of any scale. The multinationals control 90 per cent of the market.

The company came through the crisis, even making a chunky acquisition in 2010 that tilted it further towards the southeast. It has closed uneconomic brick works, and sold off other sites to land-hungry builders.

Now the industry dynamics have shifted in favour of brickmakers. Housebuilders face the first constraints on brick stocks since the late 1980s. Orders are taking 40 weeks to fulfil, and builders used to waiting two weeks have to pay up to jump the queue.

Michelmersh's prices have risen 13 per cent this year. And with bricks costing just £3,000 for the average new-build, there should be scope to charge more.

The problem is, the industry is still not making a sufficient margin to support investment and expansion.

The large groups are looking to dispose of assets. Michelmersh will pick off what it can, hoping to expand through the next inevitable downturn in the housing market. But the shares at 70p trade on a frothy forward earnings multiple of about 32 times. Even investors with the patience of Job will struggle to justify that price.

Accsys denied

From old construction materials to new ones.

Accoya is a softwood so robust it can withstand more than half a century out in the elements without shrinking, swelling or rotting. It is hardened through a pickling process using acetic anhydride.

Accsys, a British group run by the brother of the deputy prime minister, has found a way of producing it on a scale sufficient to be used in buildings and bridges.

The company even has a foothold in China – and therein lies the problem.

A knotty dispute over a licensing agreement with a Chinese company has gone against Accsys, which leaves it facing a hefty legal bill and claims for damages.

The story goes back to 2007, when the former managers of Accsys struck an exclusive deal under which Hong Kong-based Diamond Wood would pay €20m and royalties to manufacture Accoya in a new factory and distribute the product under licence.

By 2013, Diamond had yet to start work on the plant, having failed in its attempts to raise the €65m required.

Accsys, in a bid to extract itself and sign up with another Chinese partner, terminated the licensing agreement, upon which Diamond took the dispute to arbitration seeking damages it said at the time “could exceed €140m”.

So far, so scary. For Accsys, a lossmaking company with a market cap of about €90m, that kind of penalty could have been terminal. The Windsor-based group would have joined the ranks of small British companies felled by their overseas ambitions.

And yet, though the London arbitration hearing last week ruled in favour of Diamond, the damages have been capped at €250,000.

Accsys is left with the same intractable problem of being locked in an exclusive agreement with Diamond, which plans to try once more to raise cash via a reverse takeover on either London’s junior market or Singapore’s Catalist exchange.

But since the arbitration process began, Accsys has increased its revenues by almost 80 per cent. The shares are up almost two-thirds on a year ago.

It has also entered into an agreement with Belgium chemicals group Solvay, which will build a factory with almost twice the capacity of Accsys’s existing Dutch plant – suggesting the company has a future despite its Chinese pickle.

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