Since the start of the year, the Ibstock (LSE: IBST) share price has risen 14%. During the last 12 months the stock is up 19%. Of course, past performance is not an indication of future gains. But I reckon now could be a buying opportunity.
Last week, Ibstock released its trading statement for the first quarter of 2021. I think it’s worth taking a closer look at it.
An overview
Before I analyse the announcement, I’ll give a quick overview of what Ibstock does. What I like about this FTSE 250 company is that it’s simple to understand.
In a nutshell, it manufacturers and supplies clay and concrete building products. In fact, Ibstock is the UK’s leading brick manufacturer by volume sold. It has 36 manufacturing sites across the UK and has over 2,000 employees.
Like most firms, 2020 wasn’t a great year for Ibstock. Revenue and profit took a hit. The pandemic severely hampered the construction industry. The stock is linked to the housing market. So as the housebuilders suffered so did the Ibstock share price.
The trading update
As the lockdown restrictions in the UK start to ease, I’m optimistic about the brick-maker. In its latest trading statement, Ibstock reported that it “has made a good start to the new financial year”.
The company “is trading modestly ahead of expectations, with robust demand from both the new-build housing and Repairs, Maintenance & Improvement (RMI) end markets”.
To me, this is somewhat encouraging, but I can’t help but feel that there is a cautious undertone in the statement. I guess the management team needs to be prudent about the challenges that lie ahead. The coronavirus crisis is far from over and could cause further economic uncertainty and disruption. This could impact the business as well as the stock price.
But despite the caution, the board “remains confident for the year ahead”. I think the recovery will take time and the Ibstock share price could rise from its current level.
Strategic growth investment
It’s encouraging to see that the company is restarting the project to redevelop its Atlas site in the West Midlands. The point of this is to replace the existing facility with a new state-of-the-art clay brick factory to increase production capacity. The project also includes investment to upgrade and expand capacity at the adjacent Aldridge brick factory.
The total cost of the project is £60m. What gives me some comfort is that the company would not be restarting a significant project like this if it wasn’t confident about the future prospects. It’s clear to me that the management team is looking past the peak pandemic pessimism.
In terms of paying for this and its impact on cash flow, the company has staggered its payments. £10m will be due in 2021, £30m in 2022, £15m in 2023 and the balance in 2024.
My view
Any delays in the easing of lockdown restrictions could impact the construction industry and the company. Also an increase in economic uncertainty may hinder investment projects, such as Atlas, again.
But I think long-term drivers could boost the Ibstock share price. There’s still a need for good quality UK housing, which means that the demand for bricks is likely to continue.
Ibstock is in a prime position to capitalise on this growth opportunity. That’s why I’d buy the stock in my portfolio.
