Leading brick and masonry products manufacturer Forterra has confirmed it expects to deliver underlying PBT in the FY to December 2019E in line with expectations, after a resilient performance in Q4 against continued political and economic uncertainty in the UK. It now expects the challenging market conditions experienced in H2 2019 to “gradually improve” but anticipates that performance in H1 2020E will be below the level achieved in H1 2019. We have taken a conservative stance to our FY 2020E estimates, but believe the fundamentals remain strong, supported by housing and infrastructure.
Today’s ‘in-line’ trading update confirms the guidance of its 22 October update, that FY 2019E performance would be “modestly below last year's result” due to “short-term political and economic uncertainty”. As a result we are not changing our FY 2019E estimates: adj PBT of £62.1m, which we believe is at the low end of the consensus range of £62 - 63m, and net debt of £44.2m.
Housing and other data since the 12 December General Election has indicated the housing market and parts of the wider economy have shown varying degrees of improvement. The stronger secondhand housing market, indicated by RICS, has anecdotally led to greater ‘footfall’ on new developments. But we believe it will take some months for housebuilders, Forterra’s main customers, to open sites, with some having pulled back production in H2.
We assume greater visibility on housebuilding will emerge following the 10 March results and throughout the year. In the meantime, we assume the conservative company will be taking a conservative stance. Against a more H2-weighted outlook, we believe an unchanged outcome for FY 2020E over FY 2019E should be seen as a decent outcome and have cut our adj PBT from £66.9m to £62.1m. The other main change for FY 2020E is we have increased net debt from £47m to £70m, mainly due to investment phasing at the Desford plant.
Our view is that FY 2021 and beyond could see material increases in housebuilding, supported by government initiatives and an improved market, fuelling the larger Bricks & Blocks division, and infrastructure investment, benefiting Bespoke Products.