Ibstock plc (IBST) Ordinary 1p

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Ibstock’s half-year revenue fell 20% to £178mn, below market expectations of £204mn. The miss was driven by worse residential sales volumes and a “modest reduction in selling prices”.

Underlying cash profit (EBITDA) fell 40% to £38mn, in line with group expectations.

Underlying free cash flow improved from an outflow of £22mn to an outflow of £16mn, reflecting lower levels of investment into the business. Net debt rose by £49mn to £138mn.

The group is “encouraged” by an “improving trend in sector lead indicators”, but their impact on the current financial year is likely to be limited. As a result, second-half underlying cash profits are set to be broadly in line with the prior year’s £44mn.

An interim dividend of 1.5p per share has been announced, down from 3.4p last year.

The shares rose 1.6% following the announcement.

Our view

It’s been a tough first half for brickmaker Ibstock. Revenue and profits were both down significantly year-on-year, and overall performance fell short of market expectations.

Elevated mortgage rates continue to weigh on housing affordability, causing housebuilders to be conservative about starting new projects. That’s contributed to weaker demand for Ibstock’s products, and both volumes and prices have fallen as a result.

That’s not a good combination for Ibstock. Brickmakers typically have high fixed costs as the kilns used to make the bricks require a lot of energy to heat up. If enough revenue isn’t coming in the door, there’s little wiggle room to cover the high fixed costs

Efforts are being made to pull back production, carefully matching supply with demand to avoid a build-up of inventory, which would put more downward pressure on prices. Cost cuts are also continuing at pace. So far this has been enough to keep margins broadly flat. But cost cuts can only go so far, so the squeeze on margins will remain an issue to grapple with moving forward.

To help keep hold of cash, the interim dividend has been reduce. 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. However, it does mean the 2.9% forward dividend yield could well end up lower than forecast.

Ibstock has the largest brick-making capacity in the UK. And 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.

With the advent of Ibstock Futures, there's also a push to become a leader in more sustainable housebuilding. This new arm's first order of business is brick slips, a type of lightweight brick facade, which should also help fuel growth prospects when the market turns.

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.

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.

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.

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 Refinitiv. 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. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Previous Ibstock plc updates