Ibstock reported a 36% decline in first half revenues, falling to £131m. The company reported an underlying loss before tax of £11m, compared to a £42m profit last year.
The group finished the half with net debt of £103m, up 66% year-on-year.
The majority of the group's manufacturing sites are now open again, with a significant recovery in demand in more recent months. However, continued uncertainty means it remains difficult to predict full year results.
The shares fell 2.1% in early trading.
The closure of much of the UK construction industry in April and May saw Ibstock's brick sales slow to a trickle. Exposure to infrastructure and repair and maintenance markets meant concrete performed better, but the picture is still pretty negative.
Demand has recovered more recently, but sales remain well below last year. We suspect major housebuilders are running down existing inventory, which would suggest demand will return eventually, but we also worry the pace of construction has slowed thanks to social distancing restrictions with longer lasting consequences for sales.
Given a rather bleak economic outlook could well see housebuilding slow further in the months to come it's no surprise the immediate future is all about conserving cash through lower costs.
The group is closing or mothballing three factories, capital expenditure has been slashed and15% of staff will be 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.
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. 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 extra debt 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 and we wouldn't be surprised if it turns to shareholders for extra funds.
Ibstock key facts
- Price/Earnings ratio: 18.0
- Average Price/Earnings ratio since listing: 11.8
- Prospective yield: 3.1%
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Half Year Results
Production stopped in late March, and didn't get underway again until May. By July Clay products were delivering volumes at around 80% of last year, while Concrete sales came in at around 85%.
Clay products revenue for the half fell 43% year-on-year to £86.5m. The division reported a loss before tax of £43.4m, down from a £38.4m profit last year. The recovery later in the half has been driven by a stronger demand from builder merchants, with housebuilders relatively weaker. Ibstock plans to close two factories, representing 5% of total output, and mothball the Atlas factory in the West Midlands while delaying planned investment in the site.
The UK Concrete business saw sales fall 15% to £44.5m, or 28% on a like-for like basis. Profits before tax fell from £6.0m to a £2.6m loss. The division's better performance reflects exposure to the Renovation, Maintenance & Improvement (RMI) and infrastructure markets - with particular demand in fencing and rail.
The group has launched an extensive restructuring programme, which is expected to deliver £20m of savings in 2021. This comes at a cost of £10m and effects as much as 15% of the workforce.
Ibstock reported a £14.8m underlying free cash outflow for the half, although free cash was positive in the second quarter. However, the group also expects to incur £16m of additional cash costs related to restructuring and coronavirus.
Net debt now stands at 1.6 times cash profits, while Ibstock has access to £110m of additional cash funding.
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