Ibstock expects first-half sales volumes to be ‘’materially’’ ahead of last year, due to increased demand from residential construction markets.
Ibstock found it challenging to pass on the impacts of cost inflation due to a competitive market and lower average selling prices. Bringing production capacity back online has also led to higher-than-expected fixed costs, and margins have come under pressure as a result.
The group expects full-year underlying cash profits (EBITDA) to be between £77-£82mn, below consensus expectations of £90mn.
The shares fell 15.1% in early trading.
Our view
Ibstock’s sales volumes ramped up as expected over the first half and look set to land well ahead of the prior year. But average selling prices have fallen due to a shift in mix towards new-build customers. Meanwhile, fixed costs have risen as production comes back online, causing margins to get squeezed. As a result, full-year profit expectations landed well below market expectations, causing the shares to fall sharply on the day.
It’s been a tough couple of years for the brickmaker. Elevated mortgage rates have been weighing on housing affordability, causing housebuilders to be conservative about starting new projects. There are early signs that we’ve turned a corner now though, with confidence and activity in the housebuilding market starting to pick back up.
If expectations of further interest rate cuts through 2025 are met, mortgage affordability should improve slightly and feed through to increased demand for Ibstock’s products.
In order to be ready for this potential uplift, Ibstock’s starting to bring more capacity online. Ibstock now has the largest brick-making capacity in the UK. And upgrades to other sites should help 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.
Ibstock’s near-term profitability has come under pressure due to poor execution of the production ramp-up. But longer term, the group still has attractive growth prospects, and there are end-markets are looking healthier than they have done for some time. At the current valuation, investors could be rewarded for their patience. But there’s no guarantee, 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.
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