Today’s results from clay brick and concrete products manufacturer Ibstock (LSE: IBST) show that the company is making encouraging progress. Its sales for the first half of the year increased by 3.3% on an adjusted basis, while EBITDA (earnings before interest, tax, depreciation and amortisation) rose by 7.3%.
This was in line with market expectations, with Ibstock’s clay segment seeing the benefit of good activity levels from the new build housing sector. This more than offset the previously announced brick destocking by UK merchants, while Ibstock’s concrete products have performed well, particularly in the domestic landscaping RMI sector.
Uncertain outlook
Although there’s a considerable amount of uncertainty surrounding the UK construction sector in the aftermath of the EU referendum, Ibstock’s like-for-like (LFL) July brick volumes are at the same level as in 2015. Its exposure to non-UK markets such as the US also provides it with a degree of protection against a declining UK economy. However, its forecasts for the next two years are lower than those of construction sector peers CRH (LSE: CRH) and Balfour Beatty (LSE: BBY).
For example, Ibstock is expected to record a rise in profit in the current year of 4%, with a fall in its bottom line pencilled-in for next year. CRH is due to record a rise in earnings of 72% this year, followed by 19% next year and Balfour Beatty is expected to move from loss to profit this year followed by a rise in net profit of 42% next year.
Of course, Ibstock doesn’t have the legacy problems of Balfour Beatty. The latter has been lossmaking for the last two years after entering into unfavourable contracts that it’s still seeking to bring to swift conclusions. However, they could plague its near-term progress and with Ibstock having a stronger balance sheet than Balfour Beatty thanks to its prudent capital discipline, it appears to be a lower risk option.
The best option
However, CRH remains a better diversified and more financially stable entity than Ibstock. It also looks set to deliver superior growth in the next couple of years and with it having a price-to-earnings growth (PEG) ratio of 0.9 versus 2.2 for Ibstock, its shares offer more growth potential at the present time. It also upgraded its EBITDA forecast last month from €1bn to €1.1bn for the first half of the year, which shows that its current strategy is starting to bear fruit.
This includes an aggressive acquisition programme that has seen it purchase CRL and specific assets from Holcin and Lafarge. Its gearing of 68% indicates that there’s further scope for more acquisitions, while its €1.4bn free cash flow shows that it can afford to pay higher debt servicing charges since they were covered 3.5 times last year by free cash flow.
While Ibstock also has a sound strategy that includes multiple major UK capital projects, CRH is cheaper, has better growth prospects and a more aggressive strategy. Therefore, it seems to be a better buy than Ibstock, although both companies offer less risk than Balfour Beatty which continues to make progress, albeit in the face of onerous legacy contracts.
