Leading UK brick manufacturer Ibstock (IBST) is a worthy building block for any ISA or SIPP (self-invested personal pension) ahead its full year results on 7 March 2017.

We believe there are positive signs in the UK brick market not reflected in its undemanding equity valuation.

Based on consensus forecasts the stock trades on a 2017 price-to-earnings ratio of 10.4 and yields more than 4%.

Despite being priced as a ‘value’ stock, Ibstock is actually showing strong momentum.

It enjoyed earnings upgrades in the wake of a decent trading statement in November 2016 and the same again in January 2017.

Management said: ‘Growing housebuilder activity supported a stronger second half and national brick imports declined significantly over the year.’

This chimes with the number two player in UK bricks, Forterra (FORT) which pointed to brick sales volumes up in November and December 2016.

This encouraging commentary offers a good snapshot of overall sector conditions given that Ibstock and Forterra account for 70% of the market.

Broker Davy says: ‘The evidence would suggest that the brick sector starts 2017 on the front foot, particularly boosted by the robustness of the new housing market.’

In 2013 and 2014, a spike in the housing market caused ‘panic buying’ of bricks by housebuilders, reducing UK stocks to around 339m.

Brick prices spiked some 16% in both 2014 and 2015 and housebuilders began to import supplies because of fears the domestic industry may not be able to maintain supply.

Government statistics show stocks are now down 14% on their most recent peak in May 2016 at 544m, helped by reductions in domestic production and fewer imports on the back of sterling weakness making it more expensive to buy from abroad.

This implies greater pricing power for the brickies in the UK domestic market and should dispel investor concerns around over-stocking of bricks by the housebuilders.

Lower risk exposure

In some respects, brick makers offer lower risk exposure to the housing market. Because they represent a modest proportion of the overall cost of building a house, their fortunes are dictated more by the volume of new house sales than the price.

There is a need to build more homes to address a growing shortfall. The House of Lords Economic Affairs Committee recently recommended 300,000 new homes should be delivered a year against the 120,000 built in 2016. That offers confidence on demand for bricks. (TS)

Ibstock (IBST) 180.5p

Stop loss: None

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