UK housing is booming, but Ibstock offers a risky bet


Brits love bricks. Four-fifths of new houses in the UK are brick clad, versus about a quarter in Germany and fewer than half in the US. Even a pandemic cannot alter the British ideal of owning a home that outlives its buyer by at least a century.

That’s good news for Ibstock. Britain’s biggest brickmaker nudged 2020 earnings targets a tad higher on Thursday, saying volumes held steady last quarter at about 90 per cent of the 2019 level as housebuilders got back up to speed.

Any upgrade is welcome from a notoriously cyclical industry that already bears the scars of private equity opportunism. In 2015 Bain Capital doubled its money by floating Ibstock within a year of buying it. Main rival Forterra was rushed to market soon after, having been owned by Lone Star Funds for barely a year.

What triggered their haste was a jump in UK housing starts that followed the introduction of the government’s Help to Buy property subsidy scheme — even though the direct benefit proved modest. The big two were caught cold having only just emerged from the credit crunch, which had cut total brick consumption by 44 per cent and pushed many rivals to the wall. Because it can take five years to build a brickworks, much of the demand recovery was met by number-three player Wienerberger, which shipped pallets from Benelux. Meanwhile, huge cost bases amplified small shifts in sales so by mid 2016 both Forterra and Ibstock were under water by a third versus their float prices.

The next cycle is no easier to predict, though signs so far are promising. Ibstock says demand has been resilient ahead of a housing market cliff edge in March, when the stamp duty holiday expires and a downsized Help to Buy scheme comes into force. Annual contract talks with merchants stayed rational, nonetheless, as might be expected when three companies control more than 90 per cent of the market.

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Bricks are tough to disrupt in other ways too. Imports put a cap on pricing power but the barriers to entry are otherwise very high, as there are few opportunities to buy a clay pit. Big customers have not followed the lead of housebuilder Persimmon, which built a concrete block mill that can meet two-thirds of its annual requirement. Since bricks account for about 1 per cent of a house’s build cost, it’s hardly worth their bother.

The only catch now is valuation. Ibstock trades at more than 18 times 2021 earnings, versus a through-the-cycle norm for builders’ merchants of about 13 times earnings. That suggests investors are already looking to next year, when shrinking net debt promises expansion and cash returns, while ignoring the housing market risks that would cause a profit recovery to hit a wall.

Hipgnosis: slippery when wet

The pun in the name of the Hipgnosis Songs Fund is becoming troubling, writes Jonathan Guthrie.

Are its shares really a chance to benefit from its music industry savvy, as implied by “gnosis”, a Greek word for “knowledge”? Or have investors been brought to a state of mesmerised compliance by charismatic founder Merck Mercuriadis?

The fund has just announced an equity offering without saying how much money it plans to raise. That is consistent with complaints that disclosure is too sketchy at this cash-guzzling, fast-growing music rights business.

Lombard has been assured it is perfectly normal for specialised investment companies to mount open-ended financings of this kind. So it is noteworthy that Hipgnosis did set a target — up to £250m — on a September equity issue.

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The business may be coy this time because gross proceeds came in a little light at £190m back then. Equally, investors may have been alarmed by Hipgnosis’s statement in December that it might raise more cash while “in active discussions on a pipeline with an acquisition value of approximately £1bn.”

Hipgnosis buys music rights for songs penned and performed by the likes of Bon Jovi, Blondie and Neil Young. These have risen in value thanks to the advent of streaming services. The fund has underpinnings that some other opinion-dividing businesses lack. A trailing dividend yield of 4 per cent is one of these. Backers include grown-up institutions such as Aviva, Schroders and Axa.

But Hipgnosis is still a highly risky investment. Analysts grumble increasingly about skimpy disclosure. The fund publishes regular stock market announcements of song rights it has bought. These get hefty press coverage. The terms of the deals are disclosed rather more rarely.

Valuation is another bugbear. Stifel analysts say the worth of music catalogues are routinely revalued upwards by independent valuation agent Massarsky not too long after Hipgnosis acquires them.

The impression that a fund creates value simply by buying assets could theoretically trigger a cycle of rising shares, new equity fundraisings and bigger asset purchases at higher prices. Sooner or later, the merry-go-round would run out of steam.

Mr Mercuriadis shows every sign of believing passionately in what he is doing. He is a knowledgeable music industry insider, having managed bands such as Guns ‘n’ Roses. Their Appetite for Destruction album was a classic. But like heavy rock bands, stock markets have their own weird and sometimes dangerous dynamics. 

Ibstock: bryce.elder@ft.com
Hipgnosis: jonathan.guthrie@ft.com



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