Although FTSE 250 shares have managed to stage a recovery from recent lows, a number of shares are still drastically underpriced. I believe one such share is the UK’s leading brick maker, Ibstock (LSE: IBST). The Ibstock share price is currently 40% lower than its high in February. This is due to the loss of profits caused by the coronavirus lockdown. But I recently wrote about the strong long-term prospects of the construction industry, and I think that Ibstock shares will profit from this. The main reasons for my optimism about this FTSE 250 stock are its strong balance sheet, promising future, and an improvement in fortunes for the construction industry.
A leading FTSE 250 stock As the UK’s largest brick manufacturer, Ibstock is in a very strong position to benefit from the demand for construction. While lockdown has lowered this demand, I believe this is a short-term problem. In fact, the increasing UK population will ensure that demand for new homes is a major priority for the government. The construction sector has also been one of the first to restart and it has seen higher levels of demand in recent weeks. Ibstock is well-positioned to gain from this demand because around 80% of new homes use clay bricks in construction. Forty-one manufacturing locations and the largest clay reserves in the UK has also cemented Ibstock as a market leader. This provides the FTSE 250 stock with an advantage over other firms in the construction industry.
An excellent balance sheet As a cyclical business, Ibstock is very exposed to downturns in the overall construction industry. Fortunately, a strong balance sheet should help mitigate the impacts. The FTSE 250 firm has managed to keep debt levels low, while cash flow has remained high. Prudence in cancelling its dividend has also helped preserve cash. The company should therefore have sufficient liquidity to survive the crisis, while access to a revolving credit facility of approximately £215m could also be very useful. In terms of the dividend, I believe that this is a short-term loss. With a dividend that should yield around 5.5% in the future, this makes Ibstock a very attractive FTSE 250 stock.
A positive future While the pandemic may hinder growth in the near term, I still believe the long-term future of Ibstock looks very bright. Its strong balance sheet will give it the capacity to invest in the company. For example, rising profits from the concrete area of the business will give Ibstock another dimension. The recent acquisition of Longley Concrete has aided these profits. There are also plans to build a new £45m brick factory by 2022, which should boost brick production by 80m units. This gives me hope that Ibstock will thrive in the long term and the share price will grow significantly from its current price. I therefore rate this FTSE 250 stock as a long-term buy.
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Stuart Blair owns shares in Ibstock. The Motley Fool UK has recommended Ibstock. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020