MIDAS STOCK TIPS: Forterra Is The Perfect Building Block For Future Wealth

Britain needs bricks. The country uses 2.4 billion a year, but local production stands at 2 billion, so we import 400 million of these heavy blocks from abroad. The process is cumbersome, expensive and of relatively recent development.

Prior to 2008, UK companies produced around 2.6 billion bricks a year. Then the financial crisis erupted. The real estate market collapsed, demand for bricks dried up, and businesses either went out of business or reduced capacity.

With the economy struggling again, interest rates rising and house prices rising at the slowest pace in years, a critical question now faces brickmakers: will they in the same way as during the last confinement?

Safe as houses: Forterra, which has a brickyard in Peterborough, above, makes a product in high demand

Share prices in the industry suggest a general lack of confidence among investors. Forterra is one of the largest brick manufacturers in the country. The company went public at £1.80 in 2016 and by February 2020 shares had more than doubled to £3.70. Today they are £2.64.

This drop seems unjustified. Forterra produces around 500 million bricks a year and sells everything it makes. Clients include major builder merchants, such as Travis Perkins and Jewson, and major home builders, such as Persimmon, Barratt and Bellway.

After the financial crash, these companies suffered terribly. Many had accumulated huge debts and embarked on ambitious campaigns of speculative development. But valuable lessons have been learned from that time. Homebuilders are financially strong, they are not sitting on piles of vacant properties and the UK still suffers from a chronic lack of new homes.

Also importantly, employment is still strong and mortgage rates remain low by historical standards. All this suggests that the real estate market should prove more resilient than in 2008.

New homes need bricks, and Forterra is on top of the game. While new home activity is slowing, the company has other levers to pull. When wallets are under pressure, landlords often turn to extending properties rather than moving. Pleasant renovations — like upgrading a kitchen or installing a high-end shower — may back off, but many construction jobs fall more into the needs category — creating space for families which grow, for example.

Bricks come in all shapes and sizes and Forterra has several varieties, including the London Brick Company, which is found in 20% of all homes in England. The bricks are made in a traditional and labor-intensive way, so new properties use different varieties, made with more efficient techniques.

But the older houses were built with London Brick and most of them are still standing today. This gives Forterra a big advantage – whenever owners of older properties want to extend their homes, London Bricks are the ones to go.

The group’s bricks are primarily used in homes, but Forterra also manufactures concrete products, which are used in car parks, hotels and hospitals such as University College London and Alder Hey Children’s Hospital in Liverpool. Even Wembley Stadium turned to Forterra for its concrete.

Forterra is very cash-generating, allowing chief executive Stephen Harrison to pay out an attractive and growing dividend. The group owns all of its assets, including 2,000 acres of land and 17 factories across the country, so there are no expensive rents or rental bills to pay. And Harrison has been able to pass on rising energy and labor costs to its customers, recently raising prices by more than 25%.

Harrison is confident about the future. The company is increasing its capacity, with a new brickyard near Leicester, which will be the largest in Europe and one of the most efficient. The group is also investing in bricks more suited to tertiary sites and moving towards facing bricks, used in apartment buildings and individual houses to make them more aesthetic.

Analysts expect sales to rise 26% to £466m this year, with profits up 29% to £65.5m. The pace of growth is expected to slow in 2023, but brokers remain optimistic that Forterra’s numbers will head in the right direction. A dividend of 14.3 pence is expected for the current year, rising steadily thereafter. The company is also buying back its own shares, which should result in higher dividends.

Midas verdict: Forterra shares suffered from unease over the UK economic outlook but, at £2.64, the stock appears to have good value. It’s a solid, well-run manufacturing company that produces products the country needs and also offers a generous dividend yield of over 5%. To buy.

Traded on: main market Teleprinter: STRONG Contact: forterra.co.uk or 01604 707600

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