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Ibstock - guidance raised and buyback announced

Laura Hoy, Equity Analyst | 21 April 2022 | A A A
Ibstock - guidance raised and buyback announced

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Ibstock plc Ordinary 1p

Sell: 204.00 | Buy: 204.20 | Change 0.20 (0.10%)
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Trading in the current period has been ahead of expectations. Clay production volumes are slightly higher than forecast and input cost inflation hasn't badly hurt margins. Concrete is performing as expected, despite continuing supply chain issues. The group now expects full year performance to be "modestly" ahead of previous expectations.

The group's energy costs have been almost fully hedged for the first half, with 75% covered for the second half and over one-third purchased for 2023.

Ibstock announced a share buyback programme of up to £30m.

Shares rose 3.7% following the announcement.

View the latest Ibstock share price and how to deal

Our View

Ibstock's doing better than expected. Input cost inflation has been mostly offset by price increases, and the group's been able to capitalise on strong post-pandemic demand.

That's meant the group can focus on growth rather than survival. Management is using it's more efficient operations to pay for modernisation of two of its factories. That will increase capacity and allow the group to pounce on rising demand.

Ibstock's also looking to become a leader in more sustainable housebuilding with the advent of a new division-Ibstock Futures. The first order of business for this new arm is brick slips, a type of lightweight brick facade. The group will spend £50m over the next few years to build the UK's first brick slip factory, a venture that's expected to return roughly £10m per year when all's said and done. That represents a near 10% increase on this year's underlying profits. The division's also recently added glass reinforced concrete business to its portfolio, another step in building out the sustainability strategy. But if trading doesn't continue as expected, continued investment could put the group in a precarious position.

A red-hot property market can't continue indefinitely, particularly with talk of further interest rate rises on the table. However, it's worth noting that house prices don't necessarily impact Ibstock. The group gets paid as long as houses are being built, so a modest cooling would do no harm.

Management's spent much of the last year shoring up the balance sheet putting the group in a much stronger position, which has allowed for a new buyback programme. But demands on cash are not insignificant between rising investment and dividend payments. This is something to keep an eye on moving forward.

Ibstock's valuation is below the long-term average, suggesting the market's not overly excited. But if management can execute on its sustainability strategy and demand remains intact, sentiment could improve.

Ibstock key facts

  • Price/Earnings ratio: 10.2
  • Average Price/Earnings ratio since listing: 12.6
  • Prospective dividend yield (next 12 months): 5.2%

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 (9 March 2022)

Full year revenue rose 29% to £409m, in line with pre-covid performance. It was driven by strong demand in concrete and clay markets together with price increases to offset inflationary pressure. This helped underlying cash profits (EBITDA) nearly double to £103m, though this was £19m below 2019 levels.

A 5p final dividend was announced, bringing the total for the year to 7.5p. This is more than four times last year's pay out and more than double 2019 levels.

Clay revenue rose 31% to £280.2m. This was 7% below 2019 levels. This reflected a slight increase in volumes and a significant price increase toward the end of the year. The volume increase, together with cost management, helped underlying cash profits more than double to £90.6m. During the year the division repaid around £2m in government furlough assistance, which was largely offset by real estate gains.

The recovery in residential and infrastructure markets together with price increases throughout the year helped revenue in the Concrete division rise 25% to £128.4m. The 2019 acquisition of Longley Concrete meant revenue was 18% beyond 2019 levels. Excluding the impact of this new business, like-for-like revenue was 6% above pre-covid levels, driven primarily by price increases. Underlying cash profits rose 44% to £21.7m, but supply chain issues in the second half meant margins fell from 21.1% in 2019 to 19.3% in 2021, excluding the impact of the Longley acquisition.

Higher variable wages meant central costs rose 35% to £9.3m. The group's on track to spend £38m across 2022 and 2023 on a factory designed to build more sustainable brick facades. Construction on the factory began in the current period and it's expected to come online in late 2023.

Adjusted free cash flow was £51.0m, up £24.9m from 2020 as profits improved. This was also £17.8m higher than 2019, reflecting substantially better cash conversion, which measures the proportion of profits passed through to free cash. Strong cash flow fed into a 44% decrease in net debt to £38.9m.

Find out more about Ibstock shares including how to invest

The author holds shares in Ibstock.

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.

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