Ibstock surge is hard to justify

The 15 per cent rise in Ibstock's share price yesterday was rather curious. Having pitched its pounds 100m, two-for-three rights issue at 55p, the shares might reasonably have been expected to fall to somewhere around 67p from Wednesday's close of 74.5p. In fact they jumped to 85.5p, a massive vote of confidence in the acquisition of Redland's UK brick operation.

Certainly the deal makes sense, if only defensive sense, and if the savings Ibstock has already made from its acquisition last year of Tarmac's brick business are anything to go by the cost benefits of this much larger purchase could be substantial. But at pounds 160m, compared with an operating profit last year of just pounds 8.9m, the savings would have to be pretty mouth-watering. One suspects the real winner in this deal is, for a change, Redland.

Anyone who thinks that a 35 per cent share of the UK market will give Ibstock and Hanson (31 per cent) a free hand in setting prices is likely to be gravely disappointed. With Baggeridge, CINVen and Marshalls snapping at their heels with a combined 17.5 per cent slice of the market, bricks are going to remain as competitive as ever.

That was confirmed by profits for 1995, which showed a marked slowdown in profits in the second half after a buoyant interim period. Continuing poor trading in the first half of this year, together with an expected slump in profits from the now highly cyclical Portuguese pulp interests, lay behind a pretty unequivocal warning on future profits.

Because of that the company must hope the nod and wink it has received from the Office of Fair Trading holds true and the deal is waved through in return for a minimum of plant disposals.

If the bureaucrats are finally accepting that the brick industry can only prosper in a heavily rationalised form then things must be even bleaker than previously thought.

After yesterday's surge, it is not at all clear that the shares fully reflect that reality. On the basis of forecast pre-tax profits of pounds 22m and pounds 37m next year (with a full Redland contribution), the shares stand on a prospective price/earnings ratio of 18 falling to 14.

With the rest of the building materials sector on a rating of 13 to the end of 1997, that is an unjustifiable premium. The more so when the volatility of the pulp business means analysts' forecasts at this early stage are really only so much guesswork. The rights issue has been priced to go, but in the market the shares are too expensive.