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Ibstock - full year picture tough, but revenues recovering

Sophie Lund-Yates, Equity Analyst | 10 March 2021 | A A A
Ibstock - full year picture tough, but revenues recovering

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Ibstock plc Ordinary 1p

Sell: 218.40 | Buy: 218.80 | Change -1.80 (-0.82%)
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Ibstock's full year revenues fell 23% to £316m, with underlying profits before tax down 86% to £12m. That reflects coronavirus-related slowdowns and high fixed costs in the first half. The group saw a "steady and sustained recovery in demand" in the second half, and revenues were 90% of 2019 levels in the final quarter.

Dividend payments have been resumed. A final dividend of 1.6p per share was announced, lower than the 6.5p dividend for 2019 which was cancelled. The new dividend is equivalent to 2.5 times underlying profits.

The shares were broadly flat in early trading.

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Our View

The pandemic ground construction to a halt in 2020. Ibstock grappled with nearly non-existent brick sales during the first half. But the group's staging a comeback. Demand's recovering and means Ibstock finished the year in a better position than we'd feared.

Management used the past year wisely - cost cutting was a common theme for businesses across the globe and Ibstock was no exception. The group shut down 3 of its factories and mothballed another. Ibstock also cut its workforce and paid down some of its debt. Much of that was to offset the sharp decline in demand, but the group also focused on lowering its overall cost base which should translate into better margins moving forward.

We think that provides a sturdier foundation for Ibstock to capitalise on an economic recovery.

The trouble is that an economic recovery is far from guaranteed despite the ongoing vaccine rollout. If the crisis shifts from being one a public health crisis to an economic one, the housing market - Ibstock's bread and butter - will be in for a bumpy ride.

For now we're encouraged by the government's commitment to keeping a floor under the housing market, and it's worth noting that house prices don't necessarily impact Ibstock. The group gets paid as long as houses are being built. Ultimately the group's performance is tied to an economic recovery--it costs money to build things, and budgets will get slashed if the economy takes a left turn.

In that scenario, Ibstock isn't exactly sitting pretty. Although it's made strides to lower its debt obligations, net debt is still 1.5 times cash profits. That's at the top end of management's objectives. With that in mind, we're not expecting management to abandon its cash-saving plans completely, which means it will likely take time for the dividend to climb back up to previous levels. Remember no dividend is ever guaranteed.

Ibstock's trading some way below its price to earnings ratio, which reflects the uncertainties ahead. We think Ibstock's in a strong position to benefit from the economic recovery - but the shape and timing of this is hard to map, so ups and downs are possible.

Ibstock key facts

  • Price/Earnings ratio: 19.7
  • Average Price/Earnings ratio since listing (2015): 12.4
  • Prospective dividend yield (next 12 months): 2.6%

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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Full Year Results

Ibstock Clay revenues of £213.2m were down 29%, as brick demand declined to 10% of pre-COVID levels in April. A steady recovery through the end of the year brought revenue back to roughly 85% of 2019 levels. Margins rose to just over 30% in the final months of the year, which is close to the underlying margins of 2019. The sharp reduction in revenue and high fixed costs earlier in the year offset this though - underlying cash profits (EBITDA) fell 59% to £44m.

Concrete revenues were 5.3% lower at £103.0m, with sales volume declines being partly offset by strength in Renovation Maintenance & Improvement, as people spent more on home improvement. Underlying cash profits fell 31% to £15m. Cash profit margins were held back by reorganisation costs and lower productivity because of social distancing.

The group underwent a major restructuring to lower its cost base. After closing three of its factories and mothballing another, management expects to be able to ramp up to 2019 output levels by utilising capacity at some of its existing locations. The restructuring is expected to generate cash costs of £9m and deliver £20m worth of cost savings in 2021.

Ibstock recognised £35.7m worth of one-off charges, including a £20.4m write-down in the value of its assets and £8.7m worth of restructuring costs, like severance packages and factory clearance.

The lower profits meant free cash flow declined £7.1m to £26.1m. Net debt of £69.2m (2019: £84.9m), represented 1.5 times cash profits. That's up from 0.7 times last year and at the top end of guidance to keep leverage between 0.5 - 1.5 times.

Management expects 2021 cash profits to come in around £93m, in line with market expectations. Capital expenditure is expected to be between £20-£22m as the group completes the final stages of its restructuring programme.

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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.