Leading brickmaker Forterra has increased its dividend pay-out guidance, reflecting the strong cashflow that has been a hallmark of the group since it floated in 2016. Today’s AGM statement confirmed “in line” trading and highlighted: “encouraging” housebuilding; good progress on the planned new brick plant; and improved productivity at the temporarily constrained Bison Precast business, acquired in 2017. We are making no changes to our estimates at this point, other than to raise our dividends by 12.5%, giving a FY 2019E yield of 4.3%.
The pay-out was raised to 45% for FY 2019E and the group undertook to “maintain the progressive policy thereafter”. We have raised our forecast from 11.0p and 12.4p for FY 2019E and 2020E respectively to 12.4p and 13.0p. We had assumed a ratio of 40% previously, although the company had not explicitly guided to this, other than in the year of the IPO. In our view, the UK’s second biggest brickmaker’s most impressive feat since then has been that it has regularly beaten expectations in reducing net debt, from a pro-forma £155m (2.2x EBITDA) to £39m (0.5x) at FY 2018. The higher dividend nudges up our projected net debt from £36m and £32m for FY 2019E and 2020E respectively to £37m and £36m.
Trading to April has been in line with management expectations, “underpinned by continuing positive activity in new build housing, with brick sales volumes modestly ahead of last year”. Group revenue to end-April has been 7.8% ahead YoY, compared with our FY 2019E growth of 4.9%, bearing in mind that H1 2018 was held back by the ‘Beast from the East’ snowstorm. We explore volume and pricing themes on pages 2 - 4.
The planned £95m plant, at Desford in Leicestershire, has received planning permission and contracts are being finalised. Full production is targeted for 2022, at which point it will be the 180 brick pa plant will be the largest and most efficient brick in Europe, according to Forterra. The Bison business, bought at an attractive price from Laing O’Rourke in 2017, had experienced production hiccups but productivity improvements since Q4 2018 have continued and the business has won new contracts.
The shares are trading at a FY 2019E P/E of 10.6x and dividend yield of 4.3%. This compares to larger rival Ibstock on 12.8x and 5.5% on the same basis, according to consensus.