Brickmaker Ibstock Plc (LON:IBST) shares slipped in lunchtime trading Wednesday after it was downgraded to ‘neutral’ from ‘buy’ by UBS on valuation grounds, with analysts saying more investment would be needed to drive any growth in the medium-term.
In a note, the bank said with brick utilisation in the UK at “high levels” and the FTSE 250 firm ramping up production at its new factory in Leicester, any more growth was likely to be limited.
There could be some upside from pricing, but with earnings (EBITDA) margins already around 30%, UBS’s analysts thought major margin expansion would be restricted.
The only other areas that could drive growth would be “another major expansion” akin to the £100mln Leicester plant or a merger or acquisition (M&A), UBS said, but added that while both were likely, a production ramp-up at a new factory could take several years and any M&A potential was “hard to assess”.
Despite the downgrade, the bank retained its target price of 270p on the stock, saying the dividend yield was “attractive” at 6% and the fundamentals of the UK brick industry “remained strong” and supported a return on capital employed (ROCE), the net profit a company earns in relation to the capital it uses, of around 26% in the coming years.
In its full-year results on Tuesday, Ibstock reported that pre-tax profits had jumped 19.1% to £92.5mln, while revenues were up 7.9% at £391.4mln.
The company said that in 2018, UK demand had outstripped supply and that it was poised to take advantage of the “robust market environment”.
The results caused a small rally in the share price, which rose 3.4% on the day to close at 260p.
In Wednesday’s trading, the shares had dropped 1.9% to 255p.