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Ibstock - dividend cancelled, factories shut

Nicholas Hyett, Equity Analyst | 25 March 2020 | A A A
Ibstock - dividend cancelled, factories shut

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Ibstock plc Ordinary 1p

Sell: 169.80 | Buy: 170.10 | Change 1.30 (0.77%)
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Ibstock has suspended production at its manufacturing facilities, as it looks to identify means of protecting cash flow during the current lockdown.

All non-essential capital expenditure has been delayed, including the recently announced expansion of the Atlas brick factory. The group also expects to make use of the government's offer to pay a significant portion of employee wages.

Ibstock finished the year with net debt to underlying cash profits (EBITDA) at the lower end of its 0.5 to 1.5 times target range, at £85m. The group has access to undrawn credit facilities worth £215m.

The group has cancelled its final dividend, and withdrawn all previous financial guidance.

The shares were unmoved in early trading.

View the latest Ibstock share price and how to deal

Our view

Rightmove recently warned "the speed of the slowdown in the UK housing market has been significant." In fact we suspect enforced self-isolation has seen both housing sales and housing construction slow to a trickle.

That's bad news for suppliers into the industry, and as the UK's largest brick manufacturer Ibstock will be hard hit. In fact sales are likely to have ground to a halt - which is why the group has suspended all manufacturing activity.

The next few months will be all about conserving cash through lower costs. The company will be looking to make maximum use of government support to pay salaries and slashing capital expenditure too.

The good news on that front is the group's balance sheet finished last year in relatively good health - with net debt to cash profits (EBITDA) last year of 0.7 times. Still with EBITDA likely turning negative for the months of the lockdown it's not a pleasant situation to be in and it's no surprise to see the dividend in the firing line.

Assuming the group weathers the storm in reasonable shape, a lot will rest on how the economy bounces back from an extended period of inactivity over the lockdown. We suspect the government will spend big to kick start construction - good news for Ibstock. And the group is also in the positive position that house prices don't overly matter - as long as properties are getting built Ibstock gets paid.

However, if we go into a prolonged economic slowdown over the coming years, cyclicals like Ibstock will struggle.

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Full Year Results - 03/03/20

Ibstock's full year revenues rose 5% to £409m, with underlying profits before tax flat year-on-year at £85m. Political uncertainty weighed on market activity at the end of the year, but the group expects this to improve through the year.

The board announced a final ordinary dividend of 6.5p, taking the full year payment to 9.7p up 2% on year-on-year.

UK Clay revenues of £300.5m were up 2.4% over the year despite some softening in the second half, as price increases offset a modest decline in volumes. Concrete revenues rose 11.1% to £108.8m, with strong growth in roof tiles partially offset by weaker infrastructure sales.

Input costs were lower year-on-year, with the benefit partially offset by higher energy and maintenance costs.

Working capital increased year-on-year as the group rebuilt inventories in its Clay business. As a result free cash fell 20.1% to £33.2m and along with the acquisition of Longley Concrete that meant net debt rose 75% to £84.9m. Net debt now stands at 0.7 times cash profits, at the low end of the group's target range.

The group announced the redevelopment and expansion of a new 80m a year brick factory at a cost of £45m which is expected to be commissioned in 2022.

The group expects building activity to improve over 2020, with results flat year-on-year as a result.

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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.