Ibstock – sales volumes fall below expectations

Ibstock’s first-quarter sales volumes were below group expectations, as activity in residential construction markets remained “subdued”.

Despite the weaker volumes, “strong” cost-cutting actions have helped to keep underlying cash profit (EBITDA) running in line with group expectations.

CEO Joe Hudson said that lead indicators suggest an increase in housing market activity, and expects volumes to improve as the year progresses. Full-year underlying cash profit guidance remains unchanged.

The shares fell 1.3% following the announcement.

Our view

2024 hasn’t got off to the best of starts for Ibstock, with sales volumes falling below internal expectations. Residential construction activity is likely to remain subdued near-term, causing a relative lack of demand for Ibstock’s products.

To combat the housing market slowdown, Ibstock’s reduced its fixed costs. It’s already permanently closed two of its brick factories and cut headcount in a bid to reign back production, carefully matching supply with demand to avoid a build-up of inventory.

These efforts to streamline the business should bring cost savings of around £15mn in the current year. And while demand and revenue remain weak, cost-cutting measures remain the key route to preserving margins, which have held up relatively well so far.

Looking ahead, the pace of cost inflation has eased from previous highs. This provides a little bit of breathing room for margins, but make no mistake, the issue remains one to grapple with throughout the year.

Despite the recent site closures, Ibstock still has the largest brick-making capacity in the UK. And recently completed upgrades to other sites should help lower production costs while also giving room to increase output when needed. That means the group's arguably better placed to benefit from higher demand when it eventually arises. But exactly when activity will pick back up is difficult to map.

There's also a push to become a leader in more sustainable housebuilding with the advent of 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 should help fuel growth prospects when the market turns. But in the meantime, it's putting a strain on Ibstock's cash flows.

While it’s too early to call for certain, there are some very early signs that residential volumes are beginning to bottom out. The fact that lenders are becoming more competitive on mortgage rates is a major positive for homebuyers, which should ultimately feed through to increased demand for Ibstock's products. But should that picture change and a more significant slowdown materialise, we could see Ibstock's volumes fall further, leaving little scope for price rises to help soften the blow.

All in, Ibstock still has attractive long-term growth prospects, especially in the brick slips segment. But we expect demand to remain relatively weak into 2025, meaning there's plenty of room for negative shocks. Investors should expect a bumpy ride.