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Ibstock - slow end to year, cautious optimism going forwards

Nicholas Hyett, Equity Analyst | 3 March 2020 | A A A
Ibstock - slow end to year, cautious optimism going forwards

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Ibstock plc Ordinary 1p

Sell: 183.80 | Buy: 185.60 | Change -8.30 (-4.32%)
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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.

The shares fell 1.6% in early trading.

View the latest Ibstock share price and how to deal

Our view

Political uncertainty in the run up to the general election knocked demand at the end of 2019. With 2020 also starting slowly, guidance for the coming year is a little behind expectations.

However, we still think Ibstock's position as the UK's largest brick manufacturer is a strong one - even if it does lack a certain amount of glamour. 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 profit margin among its UK listed peers.

Given housebuilding remains a key priority for politicians, and 80% of new builds use brick to some degree, we can't see demand crumbling any time soon. In fact Ibstock is investing substantial sums in new factories to increase supply.

Ibstock's smaller concrete business plays an important part too, accounting for around 14% of profits last year. It's likely to be the focus of acquisition activity going forwards, as management look to make smaller bolt-on deals to expand the offering.

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 management expect activity to pick up as the year goes on there's still potential for Brexit related disruption.

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 4.8%, although this could be flexed if management can find attractive investment opportunities.

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Full Year Results

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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