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Ibstock - sales tumble as building halts

Nicholas Hyett, Equity Analyst | 3 June 2020 | A A A
Ibstock - sales tumble as building halts

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Ibstock plc Ordinary 1p

Sell: 213.60 | Buy: 214.00 | Change 2.20 (1.04%)
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Revenue for the three months to the end of March was 10% below the same period last year, with sales in line with expectations for the first 10 weeks. However, sales in the period 31 March - 31 May were around 75% lower than last year, with the clay division particularly hard hit.

Ibstock has now re-opened some of its sites, although continues to take steps to reduce cash costs where possible. Net debt has risen by 23.5% since the start of the year to £105m.

The shares fell 1.1% in early trading.

View the latest Ibstock share price and how to deal

Our view

Initial data suggests the UK construction industry had its worst month on record in April and housebuilding was hit particularly hard.

That's bad news for suppliers into the industry, and as the UK's largest brick manufacturer Ibstock will be hard hit. Even now the housebuilding sector's returned to work output is likely to be lower and slower, with a focus on running down existing inventories. It will take longer for the recovery to reach the supply chain.

The immediate future is 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. Despite those efforts net debt has risen substantially since the start of the year, and with minimal cash inflows it's not surprising the dividend has been cancelled.

Ibstock has further cost savings planned, with some sites set to close and 15% of staff affected by 'restructuring' efforts. That will reduce capacity in the short term and suggests to us that management expect demand to be significantly lower in future than in the recent past.

That's a problem.

While waivers to covenants (conditions imposed by lenders) should help the group keep its head above water, it will inevitably emerge with more debt than it would like. Without a strong recovery, paying down the borrowing will be difficult and that will delay any potential dividend.

There are some reasons for optimism. We suspect the government will spend big to kick start construction - good news for Ibstock. The group is also relatively insensitive to house prices- as long as properties are getting built Ibstock gets paid. Nonetheless, if we go into a prolonged economic slowdown cyclicals like Ibstock will inevitably struggle.

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Trading Update

Volumes in the Clay division fell 90% during April, while exposure to infrastructure and renovation and maintenance markets meant Concrete performed slightly better. The group has since seen a modest recovery, although volumes are still down 70% in Clay and 50% in Concrete. The group has now reopened around a third of its manufacturing sites.

The group has furloughed "a significant portion of colleagues" during the shutdown period, reducing discretionary spending where possible and reduced salaries for management. A review of Ibstock's permanent operations aims to reduce the fixed cost base through selective site closures and changes to the size and structure of support functions. Around 15% of the group employees will be affected by the changes.

Ibstock had net debt of £105m at the end of May, with a total revolving credit facility of £215m. The group's covenants (financial terms set by its lenders) have been temporarily relaxed and the group has confirmed it's eligible for Bank of England lending facilities if necessary.

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