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Ibstock - 2022 ahead of expectations

As expected by management, Ibstock saw volumes tail off in the fourth quarter due to reduced activity...

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As expected by management, Ibstock saw volumes tail off in the fourth quarter due to reduced activity amongst its client base in the construction sector. Nonetheless, it described performance in the quarter as resilient, driven by a continued focus on price and margin management and good operational execution.

Ibstock now expects a 25% increase in 2022 revenues to about £510m, with cash profits (EBITDA) modestly ahead of management's prior expectations. Cash generation is also better than expected, with net debt at the year-end of about £46m.

Ibstock is continuing to invest in its Futures division which focuses on the shift to sustainability and industrialisation in the construction industry.

In 2023 Ibstock cautioned that higher interest rates, inflation and heightened market uncertainty are likely to impact demand for its products. However, it remains confident in its medium-term financial targets.

The shares were broadly flat in early trading.

View the latest Ibstock share price and how to deal

Our View

Even against a deteriorating outlook for housebuilders, Ibstock has been 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. But things are now getting tougher. That said, two upgrades in as many trading updates is no mean feat in the current environment.

Focus has shifted to growth rather than survival and 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 take advantage of growth opportunities as they arise.

There's also a push 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 is spending £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 an increase of about 10% on the underlying operating profits expected by analysts for the financial year just passed. The division's also recently added glass reinforced concrete business to its portfolio, as well as a fireproof cladding company, further progress in building out the sustainability strategy. But if trading deteriorates significantly, continued investment could put the group in a precarious position.

The strong property market of recent years has begun to retreat, and we're already seeing signs of falling construction activity, particularly in the new build market. However, it's worth noting that house prices don't necessarily impact Ibstock.

The group gets paid as long as houses are being built and refurbished, so a modest cooling would do little harm. But with interest rates reaching their highest levels since the 2008 financial crisis, we have concerns that a correction could be more significant. This has yet to impact Ibstock's profits, but we are seeing some indicators of a slowdown in the wider construction market.

Management's spent much of the last year shoring up the balance sheet putting the group in a much stronger position, which allowed for a now completed buyback programme. But demands on cash are not insignificant between rising investment and dividend payments.

Dividends have historically been well-covered by free cash flow, but it's something to keep an eye on moving forward. However, the recent guidance upgrade gives us some comfort that the prospective yield approaching 5% is achievable, albeit it can never be guaranteed.

Ibstock's valuation is below the long-term average, suggesting the market isn't overly excited. We think the valuation doesn't price much in for future growth prospects, but see increasing potential for shock that could negatively impact sentiment in the short term.

Ibstock key facts

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.

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 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 18th January 2023