There is no doubt that Ibstock (IBST) has endured a tough first half, but there could be long-term value on offer. The brick manufacturer has already taken the pain associated with the hiatus in construction activity earlier this year, and uncertainty around the level of demand from its core housebuilder clientele in 2021, by right-sizing its production facilities and using up existing stock. And the group has sufficient liquidity on its balance sheet and headroom within its covenants to withstand near-term disruption. Meanwhile, the quality of the group’s assets and high barriers to entry caused by the planning constraints on building new brick manufacturing facilities mean investors could benefit from a substantial rerating when any recovery kicks in.
Shares cheap relative to history
Covenants amended
Cost-saving measures introduced
High barriers to entry
Potential fall in demand
Increase in leverage
The pause in construction activity in the wake of the pandemic caused a natural drop in demand. A year-on-year fall in sales volumes – which peaked at 90 and 70 per cent for the clay and concrete divisions, respectively, in April – resulted in an 84 per cent drop in adjusted cash profits during the first half of the year. However, management has taken action to align production with the uncertain outlook, mothballing three clay factories and reducing headcount to save up to £20m in 2021, at a cash cost of £10m.
In line with other construction materials producers, as well as dialling back production it has used existing stock to service demand during the first six months of the year. Crucially, it said those sales were not discounted versus pre-pandemic brick prices. All the same, under-recovery of costs associated with stock reduction resulted in a one-off £10m hit to adjusted cash profits. July sales volumes recovered to around 80 per cent for clay products and 85 per cent in concrete compared with prior-year levels.
Given sales to housebuilders account for around 60 per cent of Ibstock’s end market, the pace at which revenues recover will depend on the extent to which demand for homes is impacted by a rise in unemployment, cessation in the stamp duty break and any fall in sale prices that is precipitated by a rise in forced sellers. Yet the risk associated with that is arguably compensated for by the shares trading at markedly the lowest multiple versus book value since listing in 2015, at 1.3 times consensus forecast book value at the end of December this year.
Admittedly, the Bank of England has tempered previous expectations of a ‘V-shaped recovery’, stating that although the economic fallout from lockdown had been less severe than previous projections, it anticipated a slowdown in the pace of recovery after the third quarter of this year. However, gross domestic product will reach pre-crisis levels at the end of 2021, it predicts. That chimes with analyst forecasts that earnings will return to growth next year – along with the reinstatement of dividends – and exceed pre-pandemic levels in 2022.
| IBSTOCK (IBST) | ||||
| ORD PRICE: | 152p | MARKET VALUE: | £623m | |
| TOUCH: | 151.8-152.3p | 12-MONTH HIGH: | 324p | LOW: 132p |
| FW DIVIDEND YIELD: | 4.4% | FW PE RATIO: | 12 | |
| NET ASSET VALUE: | 95p* | NET DEBT: | 34% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p)† |
| 2017 | 452 | 90.1 | 11 | 9.1 |
| 2018 | 392 | 92.7 | 19 | 34.5 |
| 2019 | 409 | 93.7 | 18 | 14.7 |
| 2020** | 300 | 23.4 | 5 | 0.0 |
| 2021** | 378 | 67.2 | 13 | 6.62 |
| % change | +26 | +187 | +187 | - |
| NMS: | ||||
| Market Makers: | ||||
| BETA: | 1.80 | |||
| *Includes intangible assets of £98m, or 24p a share **Numis Securities forecasts, adjusted PTP and EPS figures | ||||
| †Includes special dividends of 25p a share in 2018 and 5p in 2019 | ||||
