Ibstock's third-quarter sales volumes fell compared to last quarter, as market demand was more subdued than the group expected. Prices remained robust in the period and combined with cost-cutting measures, helped to keep margins stable.
The group expects residential construction markets to remain challenging in the near term. There are plans to slow down production and carefully match output with demand in order to avoid a build-up of stock, and not put too much strain on cash resources.
Given the difficult market conditions, cost-cutting actions are set to continue into the final quarter and offset the weakness in demand. As a result, full-year profit guidance remains unchanged.
The shares fell 2.5% following the announcement.
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Our view
Ibstock appears to be feeling the effects of a housing slowdown. Back at the half-year mark, residential volumes were down significantly year-on-year, with price increases not enough to stop group revenues declining at double-digit rates. The residential construction market's likely to remain subdued in the near term, as housing demand has crumbled amid the current high mortgage rate environment.
Cost inflation's shown some early signs of cooling but will remain an issue to wrestle with throughout the year. Further cost-cutting measures will be the key route to preserving margins, and Ibstock's confident that'll be enough to keep full-year profit guidance on track.
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. Despite the current market slowdown, the group's continuing to increase investment in its brick manufacturing network, which should fuel growth prospects when the market turns. But how long before that happens is uncertain, and in the meantime, it's putting a strain on Ibstock's cash flows.
The higher-for-longer interest rate outlook doesn't bode well for the housing sector. That's leading housebuilders to ease up on newbuild construction in a bid to conserve cash, meaning there's currently less demand for Ibstock's products. We've seen this right across the housing sector, with the number of completions falling year-on-year. If a more significant slowdown materialises we could see Ibstock's volumes fall further, leaving little scope for price rises to help soften the blow.
Ibstock's valuation's 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.
Ibstock key facts
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