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Ibstock - volumes recover, and progress elsewhere

Nicholas Hyett, Equity Analyst | 28 October 2020 | A A A
Ibstock - volumes recover, and progress elsewhere

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Ibstock plc Ordinary 1p

Sell: 212.60 | Buy: 213.40 | Change -4.20 (-1.94%)
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Ibstock has seen a recovery in demand across the third quarter. The Repair, Maintenance & Improvement (RMI) and merchant markets have remained robust and the group has seen a recovery in volumes sold into housebuilders as well. Total group revenues in the third quarter were around 88% of last year as a result.

The combination of increasing volumes and cost and capacity reduction undertaken earlier in the year means margins have also improved in the third quarter. As a result the group now expects to report underlying EBITDA of around £50m for the full year (2019: £122m)

Management expects full year net debt to be lower than the £103m reported at the half year stage.

Ibstock shares fell 7.0% in early trading.

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Our view

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 ugly.

Demand has recovered more recently, and was running at 90% of 2019 levels in September and October. That's a faster recovery than we had feared. However, we worry the combination of social distancing restrictions and a rather bleak economic outlook means the pace of housebuilding could slow again in the months to come.

Against that background it's no surprise the immediate future is all about conserving cash through lower costs. The group has closed or mothballed 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. 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, Ibstock will inevitably emerge with more debt than it would like. Getting the balance sheet back into shape will be the main focus of the rest of this year and probably much of 2021 as well. We suspect that will delay any potential return to paying dividends well into next year.

There are some reasons for optimism. We suspect the government will spend big to kick start construction - potentially 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.

Ibstock key facts

  • Price/Earnings ratio: 16.7
  • Average Price/Earnings ratio since listing: 12.0
  • Prospective dividend yield (next 12 months): 3.0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results - 06/08/20

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.

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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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 for more information.