Forterra’s guidance in its HY results today that FY 2018 results would be “in line” contrasts with this morning’s unscheduled trading update from larger rival Ibstock, warning on 2018 profits, due to production difficulties, needing more spending. We believe that Forterra, the UK’s number two, is reaping the benefits of several plant upgrades since the IPO and more aggressive rationalisation during the last downturn. We have kept our PBT, EPS and DPS estimates unchanged.
Revenue rose 10.6% YoY to £180m, driven by a 7% rise in Bricks & Blocks (B&B) sales and the Bison acquisition in H2 2017. EBITDA was up 1.3%, reflecting short term weakness in the smaller Bespoke Products (BS) division. PBT rose by 2.9%, helped by lower interest due, again, to strong cashflow; and EPS grew by 3.2%. The interim dividend was lifted by 6.5% to 3.3p.
The outlook for FY PBT is “anticipated to be in line with the board’s expectations”, although predicated on the pace of recovery in BS. Net debt continued to fall, from £69.4m to £51.9m. We are not changing our FY 2018 PBT estimate of £65.4m (at the low end of a range from £64.9m - £68.3m), but have trimmed EBITDA by £0.5m to £80.2m (consensus £81.6m), offset by a corresponding cut to our assumed interest charge. We leave FY 2019 largely unchanged.
As we highlighted in our note, 25 May, the “Beast from the East” hit demand and production across the divisions. Brick and aerated block demand, which are more exposed to low-rise housebuilding, recovered quickly, helping lift margins from 28.9% to 29.1%. However, Bespoke Products, which depends more on multi-level housing, saw slower conversion from orders into sales from developers. This was exacerbated by the integration of the Bison plant at Swadlincote and production issues at one of the existing plants, leading to management change.
Ibstock (IBST) stated that a review of brick plants following the appointment of its new CEO had “identified a number of measures required to sustain the quality and range of production output”. We have previously argued that Forterra has a more concentrated base, at an average 61 million bricks capacity for its nine plants versus 43 million for Ibstock’s 19. Forterra cut 250 million of inefficient capacity in the downturn and has invested in improving remaining plants, while Ibstock has arguably concentrated on market share. We believe this gives Forterra advantages over its main peer.