Ibstock’s Clay and Concrete revenues have been weaker-than-expected in the third quarter, driven by an ‘uncertain near-term economic and political backdrop’ which has weighed on customer demand.
Net debt is now expected to be above previous group guidance, which had pointed to a ‘modest increase’ over the prior year’s level of £122mn.
Due to the softer market demand, sales volumes in the second half of the year are now expected to be in line with the first half. As a result, full-year underlying cash profit (EBITDA) guidance has been downgraded from between £77-82mn to around £72mn.
The shares fell 7.3% in early trading.
Our view
Ibstock’s recovery has hit a wall as an uncertain near-term economic and political backdrop weighed on customer demand in the third quarter. The weakness is expected to continue over the final stretch of the year, causing the brickmaker to downgrade its full-year profit forecasts.
It’s been a tough couple of years. Higher mortgage rates have been weighing on housing affordability, causing housebuilders to be conservative about starting new projects. These challenges have been worsened by the later-than-usual Autumn budget, which has caused additional uncertainty in the housing market.
We’re cautiously optimistic that the longer-term picture is brighter, though. Government policy is generally becoming more favourable towards residential building, and there’s plenty of work to be done if the target to build 1.5 million new homes this parliament is to be met. As we move towards this target, it should feed through to increased demand for Ibstock’s products.
In order to be ready for this potential uplift, Ibstock’s bringing more capacity online. The group already has the largest brick-making capacity in the UK, and upgrades to other sites should lower average production costs while also giving room to increase output when needed. That means the group's arguably better placed to benefit from higher demand if it really ramps up again.
But it’s difficult to map how long it will be before housing returns to full flow. The sooner the better for Ibstock, given its high fixed costs, as the kilns used to make the bricks require a lot of energy to heat up. Until production runs near full capacity, operations won’t be as efficient as the group would like, meaning profitability is likely to remain under pressure.
With Ibstock’s operations focused on this side of the Atlantic, the group’s fairly insulated from the direct impact of US tariff policy. But if it leads to a global economic slowdown, demand for Ibstock’s products would likely take a hit.
To help keep hold of cash, dividend payments have been trimmed. That’s a prudent move in our view and should provide more of a cushion to combat any further bumps in the road. With major expansion projects now close to completion, there should be lower demand for the group’s cash resources moving forward.
While Ibstock’s profitability is likely to remain under pressure in the near term, we’re more positive on the longer-term picture. Its market position remains strong, and it’s doing all it can to position itself well for when the housing market recovers. But this could take a while, and isn’t guaranteed, so investors should be prepared to stomach some volatility along the way.
Environmental, social and governance (ESG) risk
The construction industry’s ESG risk edges towards the higher end of the spectrum, especially for the Materials sector. Carbon management of company operations and the impact of its products and services is the most acute risk. Other pressing issues are resource use, community relations, labour relations, and bribery and corruption.
According to Sustainalytics, Ibstock’s management of ESG risk is strong.
There is a strong greenhouse gas emission reduction programme in place, and carbon intensity has already declined moderately in recent years. ESG-related issues are integrated into the core business strategy, with management remuneration explicitly linked to sustainability performance targets. Despite this, overall ESG-related disclosures lag behind best practice.
Ibstock key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. 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.
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