Housing slowdown fears weigh down Ibstock

The near-term outlook for housebuilding in the UK is, put bluntly, pretty grim. Higher mortgage rates and planning changes are to blame – but it’s not just property developers that could find themselves in a slump. 

Suppliers to the industry, including brickmaker Ibstock (IBST), are anticipating a tricky year ahead. “Recent months have presented different challenges, with macroeconomic uncertainty, inflation and higher interest rates weighing on the demand picture,” said chief executive Joe Hudson.

The group’s headline figures show signs that the business had rebounded after the pandemic. It managed cost inflation through price rises and was able to boast of growing its revenue while transaction volumes remained broadly flat. 

Conditions in the construction sector were positive for the first three quarters of the year – with high demand for new-build properties and maintenance of older housing stock.

Ibstock also held some degree of pricing power due to historically low brick inventory levels. The UK market ultimately had to rely on imported bricks to satisfy nearly a quarter of delivered volumes. 

The group’s return on capital employed grew to 23.4 per cent – up from 15.8 per cent in 2021 – and ahead of management’s 20 per cent target. Sales growth and margins were strongest in Ibstock’s clay division. Adjusted cash profit margins fell slightly in its concrete business, due to what management called “operational inefficiencies within our roof tile business” at the start of the year.

FactSet broker consensus puts Ibstock’s forward price/earnings multiple at an affordable-looking 11.9 times for FY2023. However, we think this is fair value given the evident challenges ahead. Hold.

Last IC view: Hold, 103p, 3 September 2022