Ibstock’s like-for-like revenues fell around 10% over the first four months of the year, with price increases more than offset by lower volumes.
Higher energy and fuel prices have led to increased cost inflation, which is expected to continue into the second half. To help manage this impact, Ibstock has locked in prices for 80% of its energy requirements for the full year.
The group expects to deliver a full-year result in line with current market expectations. This points to revenue declining 2% to £366mn, and underlying cash profits (EBITDA) falling 4% to £68mn.
The shares rose 2.6% in early trading.
Our view
Ibstock had a tough start to the year, with revenues falling at double-digit rates as lower volumes more than offset price increases. Despite the challenging backdrop, management expects performance to improve from here. Together with a more efficient manufacturing network, full-year profits are now only expected to post a small decline.
It’s been a tough couple of years. Higher mortgage rates have been weighing on housing affordability, causing housebuilders to be conservative about starting new projects. While there have been early signs of improving demand in April and May, demand could pull back again if the Middle East conflict drags on throughout the year.
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 to combat any further bumps in the road. Disposals of some non-core assets, like land and its small roofing business, have also helped to strengthen the balance sheet.
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, and it’s doing all it can to position itself well if the housing market improves.
If Ibstock can avoid further disappointments, there's scope for the valuation to recover. However, the group's end markets are still under pressure, meaning investor sentiment will remain fragile until signs of a sustainable improvement emerge.
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.