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Ibstock - robust demand drives strong trading

Third quarter trading was ahead of management expectations.

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Third quarter trading was ahead of management expectations.

Clay volumes were up slightly, and in this division Ibstock has been able to pass on increased energy costs to customers. 2022 energy prices are locked in, with 50% covered in 2023.

Concrete volumes were broadly flat, with operational difficulties in roof tiling now being addressed.

A £30m buy back announced in April is nearly complete and net debt is comfortably within the target range.

Having considered the difficult economic environment, Ibstock is confident 2022 will exceed previous expectations.

The shares were up 6.4% in early trading.

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's 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 last year's underlying profits. 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 doesn't continue as expected, continued investment could put the group in a precarious position.

A red-hot property market can't continue indefinitely, and we're already seeing signs of cooling. 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. But with mortgage 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, 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 has allowed for a new 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 improvement in the 2022 outlook gives us some comfort that the prospective yield approaching 6% is achievable, albeit it can never be guaranteed.

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

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.

Half Year results (27 July 2022)

Half year revenue rose 28% to £259m reflecting strong demand and price increases to combat input cost inflation. This fed through to underlying cash profit (EBITDA) growth of 29% to £71m, helped by a particularly strong performance in the Clay division.

Ibstock now expects full-year underlying cash profits to further exceed internal expectations.

The group announced a 32% dividend increase to 3.3p.

Clay, the core business, saw revenue rise 34% to £186m reflecting volume growth across the board. Cost management together with the benefits of increased volume and price increases meant underlying cash profits rose by £17m to £64m.

The group invested around £1.5m in the Futures division, the performance of which has been rolled into the Clay division.

Revenue rose 16% to £74m in Concrete driven mainly by price increases as volumes were flat. Demand for fencing, walling and rail infrastructure was offset by operational challenges that held back roof tile volumes. One-off compensation payments and a £1m increase in roofing factory costs meant underlying cash profits fell by £1m to £11m.

Capital expenditure was £18.8m in the first half. This is expected to accelerate during the second half, bringing the total for the year to around £50m as previously guided.

Underlying free cash flow rose from £23.4m last year to £30.2m primarily reflecting improved profitability. This fed into debt falling by a third to £35.7m over the year.

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 October 2022