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Ibstock - trading in line with expectations

Nicholas Hyett | 16 January 2020 | A A A
Ibstock - trading in line with expectations

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Ibstock plc Ordinary 1p

Sell: 198.60 | Buy: 199.30 | Change 13.50 (7.29%)
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In a trading update for the year ending 31 December 2019 Ibstock said it expects to deliver cash profits broadly in line with expectations.

The shares were broadly flat following the announcement.

View the latest Ibstock share price and how to deal

Our view

Being the UK's largest brick manufacturer doesn't sound glamourous, but we think it's a good position to be in right now.

Demand for bricks has been outstripping domestic supply. Imports have made up the shortfall, making up about 19% of all UK bricks. But, as you might expect, importing bricks is expensive.

That's fine when times are good, but we'd expect the overseas players to be squeezed out first in tougher times. In the meantime, the brick shortage has helped Ibstock hike prices.

One of Ibstock's key competitive advantages is it controls the clay quarries close to its brickworks. This gives it security of supply and helps to keep costs down, supporting the highest operating margin among its UK listed peers.

Given housebuilding remains a key priority for politicians of every major party, and 80% of new builds use brick to some degree, we can't see demand crumbling any time soon.

Ibstock's smaller concrete business plays an important part too, accounting for almost 18% of profits in the first half. It's likely to be the focus of acquisition activity going forwards, as management look to make smaller bolt-on deals to expand the concrete offering.

However, for all the positives, investors shouldn't lose sight of the fact that Ibstock is a cyclical business, with a large fixed cost base. While we wouldn't be surprised to see construction activity bounce when Brexit uncertainty subsides, the group recently indicated that 2020 has started off quietly.

Fortunately management seems to be alive to that particular threat, keeping debt low to improve flexibility. Net debt is towards the bottom of the target range of 0.5-1.5 times cash profits. Combined with a healthy degree of cash conversion, that gives us comfort in the prospective dividend yield of 4.6%, although this could be flexed if management can find attractive investment opportunities.

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Full year trading update

Full year revenue was up "mid-single digits", reflecting higher prices for clay bricks and volume growth in concrete products.

Net debt stands at approximately £84m after the payment of a special dividend, the acquisition of Longely Concrete in July 2019, and an increase in brick inventories. Net debt remains at the lower end of the target range, which is between 0.5 and 1.5 times underlying cash profits.

The group saw lower levels of new build activity during the second half of 2019 amid political and economic uncertainty, and described the current market as "subdued".

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.