Shares in Ibstock (LSE: IBST) slipped this morning (17 January) after the FTSE 250 brickmaker reported a 21% slump in sales for 2023.
There’s no doubt the market is tough at the moment, but I think Ibstock is starting to look interesting as a potential recovery play for my portfolio. Here’s why.
On track to hit profit forecasts
Last year’s housing slowdown is no secret, so I expected to see a fall in sales. Ibstock says that full-year revenue is expected to have fallen by 21% to around £405m last year.
We already knew that sales fell by 14% to £223m during the first half of last year. Crunching today’s numbers tells me that this sales slump must have accelerated during the second half. I estimate H2 revenue must have fallen by 28% to £182m.
Fortunately, the company says that adjusted profits for the year are expected to be in line with previous expectations, thanks to planned cost-cutting measures.
That’s reassuring, in my view. It suggests that management has been able to judge the situation correctly and provide accurate guidance for investors.
Greener bricks could be a winner!
Ibstock’s cost-saving measures have included job cuts and the permanent closure of at least one factory.
These changes don’t mean that the company is permanently reducing its production capacity, though. In fact, Ibstock is updating its product range and laying the ground for future growth.
The group is currently opening a modern new factory in the West Midlands that will produce the UK’s lowest-carbon bricks. The first products are expected to be shipped to customers in the next few months.
The business is also investing in new production capacity at another plant to produce brick slips. These tile-like products are increasingly popular as cladding, to replicate the look of a traditional brick wall.
In total last year, Ibstock invested £65m in growth projects.
These changes should leave it with a “lower-carbon and more competitive factory portfolio”.
Chief executive Joe Hudson believes these changes will leave the business “well-positioned for a return to growth” when markets start to recover.
A recovery buy today?
Although Ibstock’s financial position looks fairly safe to me at the moment, the company does have some debt.
I think the main risk for investors is that the current slump could be deeper and longer than expected. That might put pressure on the company’s finances.
The future is always uncertain, of course. But I think Hudson is taking the right approach. I’m sure that brick demand will recover over time, as it has done before.
Broker forecasts suggest Ibstock’s earnings could drop to 10p per share in 2024, before recovering to 12p in 2025.
Those estimates price the stock on around 14 times 2024 forecast earnings, falling to a multiple of 11 times earnings in 2025.
Dividend forecasts for a payout of around 7p suggest the shares could also reward patient shareholders with a useful 5% cash yield.
On balance, I think Ibstock could be a profitable recovery play over the next few years. I think the shares look interesting at current levels.
