The fundamental investment attractions of the UK brick industry are “compelling” and Ibstock Plc’s (LON:IBST) shares look “very attractive” at current levels, UBS told clients on Monday.
With Ibstock’s stock having fallen more than 18% since the start of May to just under 213p on Friday, the Swiss bank upgraded its rating to ‘buy’ from ‘neutral’ and nudged its target price up to 270p from 260p.
In the UK brick industry, from which Ibstock derives 85% of its underlying earnings (EBITDA), demand continues to exceed supply by around 15%, which has led to the builders importing bricks and driving higher levels of margins and returns over recent years.
“While we do not see material upside to these returns, we think the downside risk is also relatively low,” the UBS analysts said.
Last week’s interim results led to downgrades due to concrete business, which makes roof tiles, substitutes for stone masonry, fencing and structural products, with UBS cutting its earnings per share forecasts by around 6% on average for the full year and subsequent four years.
But to hit the new EBITDA forecasts for 2019 and 2020, Ibstock would need to deliver 6% growth in the second half compared to the first, and just 4% for next year.
“With the brick operations running at high utilisation levels, focus will be on how to generate incremental growth over the mid-term,” analysts said, with debottlenecking initiatives underway that are aimed to unlock 4% additional capacity at a cost of £25mln.
Acquisitions are another potential area for growth, with Ibstock’s first acquisition as a listed company completed in the first half and more bolt-ons “likely in the future” and a new greenfield brick facility possible in the medium term.