Hunting For Value Among Construction Materials Stocks

10th Sep by Roland Head

3 comments 1745 reads

In a recent piece, I looked at the potential investment appeal of UK housebuilders. I concluded that they might still offer some value, but are probably not at truly compelling valuations anymore.

In the interests of disclosure, I still hold shares in one well-known UK housebuilder. But I’m a little wary about the political exposure of these businesses. Although the new government clearly wants to encourage more housebuilding, this doesn’t necessarily mean that it will support a return to the supernormal profits of the Help to Buy era (2013-23).

My caution may be unwarranted. More houses may mean more profit. But I’m cautious about investing in businesses that can be used as political footballs, unless I’m convinced they’re dirt cheap.

For these reasons, I’ve become more interested in the building materials sector, with a particular focus on companies whose products tend to be used in UK housebuilding.

Where are the opportunities?

While many of these shares have staged something of a recovery already, I think value still exists in this sector.

Last week’s profit warning from premium brickmaker Michelmersh Brick Holdings (LON:MBH) was also a reminder that the construction sector isn’t out of the woods yet. A recovery may not really get underway until well into 2025.

For this piece, I’ve selected four building materials stocks that look interesting to me right now. I used the following broad criteria to help me choose:

Reasonable valuation
Strong balance sheet, preferably net cash
StockRank of 60 or higher
Pays a dividend covered by earnings
Market cap over £25m

I should point out that my positive view on this sector is based on my belief that the UK construction and housebuilding markets are close to the bottom of the cycle. I expect conditions to improve at some point – probably next year – probably aided by further interest rate cuts.

If I’m wrong, and conditions worsen for some reason, then the opinions here won’t necessarily hold, so please DYOR and form your own views.

With that said, here are the companies I’ve chosen:

Eurocell (LON:ECEL)
Michelmersh Brick Holdings
James Latham (LON:LTHM)
Alumasc (LON:ALU)
Honourable mentions – stocks that came close to inclusion and look attractive to me

…

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Albertos

10th Sep

Thanks for the article Roland - very interesting.

However, like commodities linked to the energy transition, I begin to wonder whether the market has got too far ahead of itself.

I actually sold Michelmersh Brick Holdings (LON:MBH) before its results as I couldn't reconcile its forecasts with the rest of the sector. When its results came out, I couldn't believe how little it fell -given the analyst reduction of 28%. (In fact, another point is I won't be buying Michelmersh Brick Holdings (LON:MBH) again - I'm getting fed up of profit warning by analyst - companies that use this method are a red flag). So I think the market still has a rose-tinted view in this area.

The budget is important here - saying/promising in the run-up to the election is not the same as doing. I'd personally wait for that until committing any further.

Harry Hindsight

Hi Roland. A specialist sector and would advise to read the Grenfell Report, Not read but need to so have no idea what it contains.

Lots of materials in use, aluminium powder coated panels, aluminium framing, rubber butyl seals, rockwool or other insulation, and then brick slips and stone facades to make it look powerful and strong.

In my opinion need to drill down to the core supply. Cement for concrete, aggregates or er concrete. Iron ore and thermal coal for steel. Titanium for paint and serious metal constructions.

Insulation materials - yes ones day the skyscraper will be insulated out of discarded water bottles, my backpack is 'apparently' and very good to.

But a good sector to keep an eye on - materials, services, builders etc, land buyers.

I think there biggest problem in future is labour. There are lessening skills and all the kids want to go to uni to have fun and do homework on Google and eventually AI takes their lunch.

But lets hope the immigrants pick up the baton. Nope.

Tortoise investor

14th Sep

Michelmersh Brick Holdings (LON:MBH) did indicate the profit warning in their own commentary but you had to read carefully and they did not : it said H2 would be similar to H1 so anyone adding those two together could get to a profit warning providing you have access to Stockopedia data or broker notes. I am just adding this for completeness rather than contradicting you. In my opinion they are on the naughty step but not the naughtiest step, as I have seen some companies give no indication whatsoever and then it is contained in the broker note. Portmeirion (LON:PMP) springs to mind as one such example.

Hunting for value among construction materials stocks

Where are the opportunities?

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Roland Head

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