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Ibstock - not bricking it?!

By Chris Bailey | Monday 30 July 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

This may surprise a few people given my pessimism on the housing market and the housebuilding sector but I am not bricking it about the world of bricks. Now maybe it is because I am a sentimental old fool who lives near an area whose heritage is wrapped up in the world of bricks, but my simple observation is...

…domestic supply has gone down at a time when domestic demand has gone up. Now there is certainly scope for new materials, panic squeezes by housebuilders scrabbling to hold up margins and the like but the basic supply-demand equation has got better (from a brick company perspective). And importing Johnny Foreigner bricks might even become less appealing in the next few years too for a variety of Brexit-related reasons. Anyhow, much of the above is apparent in today's trading statement from Ibstock (IBST) which notes:

'Demand from the Group's UK brick customers continues to be strong, particularly from the new housing sector, and market fundamentals remain favourable. The Group's UK brick factories have been producing at, or close to, full production capacity for an extended period...'

Sounds good, right? So why the 12% fall in the share price today? Well, there are implications in producing at full production capacity for an extended period:

'In recent months however, particularly in July, production has been lower than expected and despite corrective measures output, and therefore cost recovery, in the second half of the year is now anticipated to be below expectations. A twelve month period of increased maintenance activity is now planned to ensure the factories can operate at sustainable levels to meet continued increasing demand.'

So basically it has been a bit - in hindsight - light on its maintenance spend. The net impact of this and related shutdowns? A c. 7% cut in underlying earnings expectations for this year.

Even so, today's 12% odd fall seems a bit rude and below 250p the share is exhibiting a bit of value in my opinion. Plugging in the new numbers and a low teens multiple, 5%+ dividend, a balance sheet helped out by a big property disposal announced a few months ago and the brick fundamentals noted above and I can make this work at the new improved price. Not a time to be bricking it on this one.

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