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Ibstock - strong performance but outlook subdued

Ibstock's full year revenues grew 26% to £513m, largely driven by higher sales in the Clay division...

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Ibstock's full year revenues grew 26% to £513m, largely driven by higher sales in the Clay division which rose by £89m to £369m. This helped underlying cash profits (EBITDA) grow by 36% to £140m.

Net debt rose from £38.9m to £45.9m. Underlying free cash flow fell 1.4% to £49.7m as higher operating cash flows were more than offset by increased equipment spending of £33.4m The group also spent £30m on share buybacks.

Activity in the early weeks of 2023 has ''continued to reflect the more cautious demand environment seen in Q4 2022''. It's anticipated that conditions will remain subdued through the early part of 2023, but are expected to improve as the year progresses.

A final dividend of 5.5p per share has been recommended, growing the full year dividend by 17% to 8.8p per share.

The shares fell 1.2% following the announcement.

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Our view

Ibstock put in a strong performance in 2022, with both revenue and profit materially ahead of prior year and pre-pandemic levels. Price increases and cost cutting measures have helped to offset input cost inflation, keeping group margins robust for now. All of this despite a challenging period for housebuilders is no mean feat, but the backdrop's likely to get tougher.

Ibstock already has the largest brick production capacity in the UK, and the group's looking to increase capacity further with the modernisation of two of its factories. The upgrades are expected to complete by the end of this year, lowering production costs and allowing the group to meet higher demand as it arises.

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's invested heavily to build the UK's first brick slip factory, which is expected to come online by the end of the year.

The division also added a glass reinforced concrete business to its portfolio in 2022, as well as a fireproof cladding company, further progress in building out the sustainability strategy. But if trading deteriorates significantly this year, continued investment could put the group in a precarious position.

But keep in mind, there are a few hazards on site for Ibstock. A potent mix of retreating house prices and higher mortgage rates have seen sales rates fall in the newbuild housing market. This is causing housebuilders to ease up on newbuild construction in a bid to conserve cash, meaning there's less demand for Ibstock's products.

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. But we have growing concerns that housebuilding is seeing a more significant slowdown. That's backed up by Ibstock's reduced activity towards the end of 2022, which has continued into the new year. And according to the Home Builders Federation, the supply of new housing in England over the coming years is set to fall to the lowest levels since the Second World War.

A lot of focus over the last year has gone on shoring up the balance sheet, which allowed for a now completed buyback programme. But demands on cash are not insignificant between rising investment and dividend payments.

Ibstock's valuation is only slightly below its long-term average., which doesn't price much in for the group's attractive long-term growth prospects. But in the current deteriorating environment, there's plenty room for negative shocks which could cause a bumpy ride for investors over the short term.

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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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 8th March 2023