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magazineBuilding the Ibstock buy case brick by brick
A positive environment for the brickmaking sector as a whole and Ibstock (IBST) specifically means now looks a good time to add a second brickie to our Great Ideas portfolio.
The East Midlands firm joins its counterpart Michelmersh Brick Holdings (MBH:AIM), which we flagged in March.
In our view the sector will continue to benefit from strong demand from housebuilders and falling brick stockpiles.
Ibstock itself will introduce new capacity in 2018 which should boost earnings materially and it has announced plans to pay a supplementary dividend. Despite a decent run since full year results in March, the shares do not yet fully reflect the growth potential on offer.
Based on forecasts from investment bank Berenberg the shares trade on a price-to-earnings ratio of 13.7 times and, with the addition of a special dividend, yield a very healthy looking 5.5%.
And these forecasts could even prove slightly conservative given the recent trading momentum and the company’s robust guidance on negotiating higher prices for its bricks.
Capacity in the UK for the soft-mud bricks which Ibstock manufactures is largely sold out with imports up 35% in 2017.
IMPROVING FREE CASH FLOW
Given their weight, bricks are an expensive product to transport and Ibstock’s new SM3 plant in Leicester could pick up a significant proportion of the demand currently satisfied by imports.
The company is guiding for 50% utilisation for this facility in 2018 as management prudently look to ensure they get processes right, but this guidance could end up being overly cautious.
Meanwhile, free cash flow is ramping up as the company emerges from a period of fairly intensive capital expenditure on expanding capacity including the construction of SM3.
This has an enabled the introduction of a new dividend policy which means if no suitable acquisition opportunities are identified then a special dividend on the scale of the previous year’s final dividend will be paid. The first supplementary payout is expected in August 2018.
Chief executive Joe Hudson, who only assumed the role on 4 April, has a background in the concrete industry and may look to bolster Ibstock’s currently modest exposure to this space through bolt-on acquisitions.
Berenberg estimates the company has around £140m available for acquisitions and reckons this war chest could be bolstered by £80m if the company opted to sell its struggling US operation. The
US market is in very different shape to the UK with a surplus
of bricks. (TS)
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