First-half revenue came in at £164mn, with like-for-like (LFL) sales down 10% as price increases were more than offset by weaker volumes.
Adjusted cash profit (EBITDA) fell 27.6% to £26mn, driven by lower production volumes and cost inflation.
Adjusted free cash outflows widened by £12mn to £22mn, while net debt rose 4.1% to £151mn at the end of the period. An interim dividend of 0.5p was announced, down from 1.5p last year.
Full-year adjusted cash profit (EBITDA) guidance has been downgraded, with management now expecting performance to come in at the lower end of market expectations of £59-68mn.
The shares fell 2.3% in early trading.
Our view
Ibstock had a tough first half, with weaker volumes and inflation pushing profits lower. Brick trends improved in the second quarter and management expects stronger cash profit in the second half, but key markets are likely to remain subdued. Full-year performance is now expected towards the lower end of market expectations, which could see consensus cash profit estimates fall by around 5-7%.
It’s been a tough couple of years. Higher mortgage rates have weighed on housing affordability, causing housebuilders to be conservative about starting new projects. Brick volume trends improved in the second quarter, but wider uncertainty and inflationary pressures mean a sustained recovery is yet to take hold.
We’re cautiously optimistic that the longer-term picture is brighter, though. Government policy is generally becoming more favourable towards residential building. The government’s target of building 1.5 million new homes this parliament looks a touch optimistic to us, given the slow start. But we do expect construction activity to trend higher in the coming years, which should feed through to increased demand for Ibstock’s products.
In order to be ready for this potential uplift, Ibstock’s brought more capacity online. The group already has the largest brick-making capacity in the UK, and major investment projects to improve capacity further are nearing completion. That should relieve some strain on cash flows in the near future and means average production costs are likely to improve when things ramp back up.
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.
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 against any further bumps in the road. Stronger cash generation is expected in the second half, which should help bring debt levels down by year-end.
While Ibstock’s profitability is likely to remain under pressure in the near term, we’re more positive on the longer-term picture. Its market position remains strong, with brick volumes outperforming the wider market, and it’s doing all it can to position itself well if the housing market improves.
However, the timing of that recovery is being pushed further out, and we struggle to see any meaningful near-term catalysts to drive an earnings recovery, leaving us with a cautious view for now.
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.
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 LSEG. 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.