This brick maker’s strong market position is not reflected in its valuation
Thursday 30 May 2019 Author: Martin Gamble

Ibstock (IBST) is the UK’s leading clay brick manufacturer and we think it could be a useful building block in any balanced investment portfolio.

With close to 80% of new buildings using brick in their construction, you might reasonably be concerned about suppliers, like Ibstock, on signs of a slowing housebuilding market. However, we believe those concerns are misplaced.

There are fundamental reasons why Ibstock might be in a stronger position that it first appears.

THREE PLAYERS CONTROL TWO THIRDS OF THE BRICK MARKET

According to consultancy IBIS World, Ibstock has a market share of 25.1%, Forterra (FORT) 24.3% and Wienerberger 19.7%, with other firms like Michelmersh (MBH:AIM) making up the remainder.

This gives the brick suppliers a good bargaining position and some pricing power. In addition, brick inventories are low, at less than 2% of annual deliveries, according to the construction and building materials April 2019 bulletin.

Bricks only make up around 2% of the total cost of building a home, meaning higher prices should easily be absorbed by the housebuilders.

MARKET IS STRUCTURALLY UNDER-SUPPLIED

Private housing construction is expected to remain buoyant, supported by the Help to Buy scheme.

The Department for Communities and Local Government (DCLG) projects that the number of households in the UK will grow by 1% per annum to 28m by 2039.

Including the existing shortage, estimated by Heriot-Watt University to be around 4m homes, it is estimated that 340,000 new homes will be needed to be built every year.

On our back of the envelope calculations, around 2bn bricks will be needed per annum to meet the target, using up close to 100% of current capacity, and keeping the market tight over the next few years.

After many years of mothballing plants, the industry is building new capacity to meet the expected demand for build new homes.

Production at Ibstock’s new Eclipse factory in Leicester, will add another 100m bricks to annual capacity as well as increase efficiencies.

Issues with its production facilities affected its ability to meet recovering demand in 2018 and this hit the share price after we previously flagged the stock’s appeal. We are hopeful these problems are now behind the company.

STRONG MARKET POSITION EQUALS SUPERIOR ECONOMIC RETURNS

Ultimately in 2018 Ibstock increased revenue by 8% to £391m and pre-tax profit by 19% to £93m. This produced a very impressive return on capital employed of 20%.

Despite these strong credentials, Ibstock trades on only 12 times 2019 earnings and offers a dividend yield of 5.5%, too miserly for such a well-positioned business.

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