Key points

• Ibstock’s share price has been underperforming for the last five years.
• New factories are set to launch in 2023 to drastically improve production capacity and profitability.
• A high level of competition poses a threat to the group’s long-term growth strategy.

The Ibstock Plc (LSE:IBST) share price is down by over 16% in the past five years despite the demand for its products continues to rise. The company is the leading building materials manufacturer based in the United Kingdom, with its shares listed on the London Stock Exchange.

It has two main divisions: Clay and Concrete.

The Clay segment focuses on manufacturing high-quality clay bricks. Meanwhile, its concrete division focuses on manufacturing precast and pre-stressed concrete building products for residential housing, landscaping and infrastructural markets.

Ibstock Brick has the largest production capacity in the UK, with 16 manufacturing sites and more on the way. The company has various subsidiaries, which include Ibstock USA Ltd, Home building Supplies, Forticrete Ltd, and Anderton Concrete Product Ltd, amongst others.

Key financial information of Ibstock

Ibstock has a market capitalisation of just over £825m with a price-earnings ratio of 13.55. The company’s latest financial report shows that revenue increased by 28% in 2022 to £259m. With efficiency improvements being deployed, this translated into a 32% rise in pre-tax profit, landing at £51m.

As a result, the group managed to lower its debt position by 33% to £36m, with EBITA margins landing at an impressive 27.3%.

Needless to say, these results are quite positive. And has enabled the firm to announce interim dividend payments of 3.3p per ordinary share on 13 September 2022 to shareholders on the register on 19 August 2022.

But it begs the question, why has the Ibstock share price suffered on seemingly solid results?

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What is the brokers’ consensus view on the Ibstock share price?

A range of brokers provides their opinion on whether A range of brokers provides their opinion and forecast on whether Ibstock Plc shares should be bought, kept or sold based on their current share value.

Overall, it seems that most analysts are bullish, with a price target of 215p versus 190p today. But not everyone is convinced. And there is a valid reason which could also explain the lacklustre stock performance.

Historically, the UK has been a mass importer of bricks to keep up with strong demand from the home construction industry. However, following Brexit, importing these heavy materials has become significantly more expensive.

This has created an opportunity for Ibstock to capitalise on, which management is seemingly trying to do. However, this is where the problems arise. Heavy reinvestment into expanding existing factories and building new ones is having an impact on margins.

£50m has been dedicated to building an automated brick slips factory in West Yorkshire set to come on line in 2023. And its new factory at its Atlas site in Walsall is causing some financial headaches.

The latter is expected to drastically improve profitability in the long term and become the UK’s first net-zero producer of bricks the cost. But the construction cost has already jumped from £15m to £75m, which causes quite a bit of short-term financial disruption.

What’s the future of Ibstock shares?

Going by the current trend of the Ibstock share price, it seems investors have been more bullish recently. But the long-term trend continues to be relatively flat.

Personally, I think the future of Ibstock seems bright. The business has a solid long-term strategy, in my opinion. And while it could take some time before its latest investments realise a return, Ibstock seems to be in quite a favourable position versus its peers.

The group has various competitors which are largely trading at similar valuations on a PE ratio basis. The list includes Forterra Plc, Corobrik, Austral Bricks, Acme Bricks, and Boral, among others.

The high level of competition does put pressure on pricing power. That means this business is very much focused on sales volumes. And that’s something its new factories will undoubtedly help boost.

Providing that its new facilities become commercial on schedule and its competitors don’t beat it to the punch, then the lack of pricing power may not be a major issue.

The firm is also committing to reaching zero emissions by 2040, with its new zero-carbon Atlas factory taking the first step towards this goal. Apart from making this business more attractive to ESG investors, this also helps eliminate the risk of unfavourable carbon tax hikes in the future.

Final thoughts on the Ibstock share price

The Ibstock stock price hasn’t been a stellar performer this past half-decade. But the underlying business seems to be performing admirably, with lots of growth potential ahead, I feel.

With plenty of cash flow and a strengthening balance sheet, I believe this stock could be a fine addition to my investment portfolio at today’s prices.

Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.