Over the second quarter of 2017, Ibstock performed well as a result of continued strong demand for products and improvements in operational efficiency. Over the quarter, the stock generated returns of 21.02%, forming a return over the first 6 months of 2017 of 34.86%. The company is due to release its half-yearly financial statements later today, and we remain positive on the outlook for this company.

Company Profile

Ibstock is a UK-based, market leading construction materials company, engaged in the manufacturing of clay bricks and concrete products. The company operates within the UK and US through a family of well known brands of building products: Ibstock, Ibstock Kevington, Forticrete, Supreme, Anderton and Glen-Gery. The company floated on the London Stock Exchange in October 2015 to facilitate increased growth and has since gone from strength to strength in terms of market share and profitability.

Competitive Advantage

Ibstock’s position as a market leader allows it to benefit from the expected growth in demand for construction materials in the UK and US. The company has large scale and diversification within its product offering. Ibstock has 28 clay and 15 concrete plants throughout the UK and US, producing over 500 varieties of bricks alongside its ownership of valuable long term clay reserves.

Demand for building products in the UK is expected to increase due to government support for new house building and population growth. Ibstock has a large and growing capacity to meet new demand levels. The company’s Chesterton plant built in 2013 increased capacity by 67%, and another plant in Leicester due to be commissioned this year is also expected to further increase capacity.

Quality of management is also on Ibstock’s side. The company’s CEO Wayne Sheppard and CFO Kevin Sims have a combined experience of 40 years at Ibstock. This is highly unusual within the industry and is a great source of strength for the company going forward.

Quality of Earnings

Ibstock’s earnings for the first 6 months of 2017 are due to be released later today, however based on historic earnings data from FY 2016, the company is in a strong financial position, with robust cash generation alongside debt reduction. The company has experienced strong revenue growth in recent years, and pays a sizable dividend, demonstrating a commitment to returning profits to shareholders.

In terms of the balance sheet, the company maintains a healthy position while continuing to reinvest heavily in the business to protect future cash flows. The company continues to acquire assets to strengthen the balance sheet while also maintaining a high level of short term liquidity as evidenced by a current ratio of 1.88. We wait for the company’s most recent earnings data, however the foundations appear to be strong and able to facilitate further growth.

Growth Potential

Ibstock continues to reinvest profits into the business, making major capital investments to support growth in the UK roofing and brick industry. The company has spent £43million so far on major capital expenditure, and has now begun the construction of a new £54miillion soft mud brick factory in Leicester. The factory is expected to be the most efficient brick factory in the UK upon completion later this year.

Alongside improvements to efficiency, the company continues to innovate by investing in research and development of new products and materials. In 2016 the company introduced a new tile line in Leighton Buzzard as well as a new ‘SL8’ line of innovative roof tiles. This was followed this year by a further line of ‘PAN8’ roof tiles which have been received well by the market.

It is clear that growth is a large part of Ibstock’s strategy through investing in key markets alongside improvements to productivity and quality. The company also highlighted in its FY2016 results that it is considering looking into acquisition opportunities to expand its product range, indicating that further growth opportunities both organic and inorganic are present.

Key Risks

  • Construction Demand
    Demand for Ibstock’s products is directly impacted by developments within construction markets as well as general level of construction activity. This can vary based on macroeconomic factors such as demographic trends, the condition of the housing market, credit availability, inflation, government policy etc. For these reasons the company is exposed to risk in this area. At the same time, due to a historic imbalance of supply vs. demand in the UK housing market, demand for new housing is strong and is likely to remain so in the next 5+ years. The government has been pursuing policies to incentivise house building and policy is unlikely to change due to housing supply shortages.
  • Brexit
    As a UK-based company, Ibstock was impacted by the referendum vote in 2016 and is negatively exposed to a weaker pound. Where sales fell in the month leading up to the referendum vote, sales volumes for Ibstock returned quickly to normal levels post-referendum and made up lost ground. Where markets initially discounted house builders and building materials supply companies, they have been coming back since the vote on the back of underlying fundamental data. Due to the continued uncertainties around Brexit, Ibstock remains exposed to risk in this area, however management have been taking steps to mitigate long-term risk where possible.

Overview

Overall, based on the company’s financials alongside its growth potential, we continue to view Ibstock as a favourable investment and have selected the stock as our pick of the quarter. The company continues to feature in our larger discretionary portfolios and continues to provide exciting returns opportunities for the portfolio over the long term. Where risks do remain, we feel that given the company’s management and strategy, over the long term the company is likely to continue to successfully lead the construction materials market.

 

The information contained in this document is provided for information purposes only and must not be communicated to any other person. It does not constitute a research recommendation or investment advice and must not be treated as a recommendation or an offer or solicitation for investment. Investors should form their own view in relation to the above mentioned investment. If you’re unsure of the suitability of any investment please contact us for advice. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.

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