Stockwatch: another oversold share due a recovery?

Despite gloomy sentiment around the housebuilding sector, it is interesting to consider brick maker Ibstock (LSE:IBST), second only to Vistry Group (LSE:VTY) as the most-shorted share on the UK market.

As a small-cap priced at 94p giving a current value around £375 million, it is easier for a double-digit percentage of its issued share capital to get shorted. But equally and unless fundamentals deteriorate to the point of the company being in financial difficulties, a tighter market bakes in the prospect of a rebound, the question being when?

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A crowded trade can also generate a rally if enough short sellers start closing positions (buying back stock) as part of risk management. Ibstock’s short position has reduced from 15.3% as of 8 June, to 13.1% currently and, given this only includes positions over 0.5%, the true position could be higher.

It coincides with the near-term chart vaguely showing a double bottom in June – at least demonstrating near-term support – despite the five-year chart looking dire:

Source: TradingView. Past performance is not a guide to future performance.

The shares actually peaked above 300p in February 2020 just before Covid disrupted that year, and have never really recovered despite meaningful rallies.

While the technical position can appear weighted on the downside, I think it pays to examine such situations to judge risk/reward. You never know when things might turn, and when they do it helps to understand the dynamics involved.

High energy prices a key macro challenge

Ibstock is the UK’s largest supplier of clay and concrete building products – it sells over 450 types of brick as well as terracotta, arches, lintels and more. It should enjoy a long-term tailwind of UK housing shortages being met with supportive government policy, but faces a near-term headwind of high energy prices involved in the manufacturing process.

Energy prices took off from the Ukraine war in February 2022, which coincides with Ibstock’s chart downturn. UK brick deliveries have also slumped around 40% over the last two years as construction has become pressured by higher costs including labour. It has led to nearly a quarter of bricks used in UK construction being imported from Belgium and The Netherlands where gas is subsidised.

Net-zero standards are also a hurdle given that bricks are assessed heavily on front-end carbon expenditure required to fire the kilns.

The UK industry is therefore demanding targeted energy support including gas price relief and a re-evaluation of net-zero building standards.

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But are such fundamentals well-known to the extent of being priced into the shares, which now trade around net asset value? Behavioural economics would also note that 13 hedge funds over the 0.5% disclosure level for short positions implies a crowded trade such that if the company’s situation doesn’t worsen, there is a coiled spring.

AGM affirms consensus expectations

The AGM on 21 May cited “a promising improvement in sales volumes in our clay business”, with market share maintained after wet weather meant a challenging start to 2026. Confidence was expressed in achieving full-year consensus forecasts and “with a well invested, lower-cost, more efficient and sustainable manufacturing network, Ibstock is well positioned to deliver growth in the medium term”.

If that broadly has substance, then an inflection point exists versus the crowded short trade. The chief macro risk seems to be a lack of resolution in the US/Iran war such that economic uncertainty and high energy prices persist, even if military conflict has toned down.

Ibstock’s update did acknowledge that uncertainty is liable to persist for consumer confidence, while high energy prices will likely extend into the second half-year. But it said: “We have taken steps to mitigate this where possible, and are hedged for over 85% of energy requirements for the first three quarters of 2026, with around 80% cover for the full year.”

Group revenue splits between around 70% clay bricks and related masonry items, versus 30% concrete tiles and structural elements. Since concrete products tend to be more budget-friendly, it seems possible that builders might reduce use of clay in pursuit of margin, although concrete versus clay should chiefly rest on specifics of building need.

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I am inclined to let the company’s narrative on sales volumes do the talking and, while it’s too early to assert a recovery, it feels too late to join the short party. Recently, the number of increased short positions is similar to those being reduced.

Ibstock - financial summary
Year-end 31 Dec

Source: company accounts.

Mixed but overall supportive valuation criteria

With Ibstock shares having fallen 70% since 2020, consensus forecasts imply a forward price/earnings (PE) ratio of 23x this year easing to 16x for 2027 – as if little to no room for misjudging the trend. Yet it is an acknowledged fact that companies strongly positioned in their markets, undergoing near-term challenges, do see their shares on apparently high PE’s given scope for subsequent recovery.

Ibstock achieved £107 million operating profit in 2022 and normalised earnings per share (EPS) of 20.3p, versus £10 million and 3.6p last year. A steady recovery scenario could see EPS grow from consensus for 4p this year and 6p next, possibly to around 10p which would give a single-figure PE.

The outstanding 2022 performance resulted from dynamic pricing that offset cost inflation and post-Covid there had been a strong recovery in UK residential construction and improvement markets. It at least set a precedent how, if the company is well-managed, investors could get lucky on a two-year view if markets improve and energy prices temper.

Meanwhile, the dividend yield is a less comforting 2.5%, rising to 3.2% assuming consensus for 2.4p per share rising to 3.1p in 2027, relative to 3.0p in 2025. The dividend had rebounded in 2021 but was uncovered from 2023 down to 0.3x in 2025.

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The shares are well asset-backed, trading around the £382 million net asset value at end-December, or 1.2x net tangible value. Intangibles constituted 17% of net assets with no goodwill.

Of concern, however, is year-end total debt including leases of £171 million, offset by £21 million cash which generated a £9 million annual net interest charge and substantially wiped out 2025 operating profit. Net profit of £3 million benefited from a £2 million tax rebate. Short sellers are thus betting on a “higher for longer” interest rate scenario while the housing market continues to struggle.

Note 8 to the account cites EBITDA profit covenants with interest cover no more than 3x and at least 4x, tested mid and end-year, on £100 million private placement notes which constitute all long-term debt. Short-term debt – under a revolving credit facility – comprised 29% of total year-end bank debt under the same covenants.

While EBITDA is not the same as reported operating profit, ostensibly the situation looks tight with little scope for trading to deteriorate. The “going concern” section within the 2025 accounts did, however, state, as of 31 December, covenant requirements were met “with significant headroom”. Since they are also tested on 30 June, there should have been an announcement if there were any problems, given that the listing rules require this as soon as possible.

It therefore tilts me towards a “buy” stance given that I think housebuilders and their suppliers are more likely to muddle through than incur the worst-case scenario that short sellers anticipate. A prudent speculator might therefore consider a starter position and see what evolves.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.