Forterra's spending leaves it in a tight spot as demand remains weak

The dreadful timing of Forterra's (FORT) £140mn expansion programme is evident in its results. The brickmaker sought to capitalise on the supply deficit that leads to hundreds of millions of bricks being imported to the UK every year, but has done so at a time when demand has fallen off a cliff. Brick despatches are down by 30 per cent, with the biggest falls experienced in the volume housebuilding sector, which made up 66 per cent of Forterra’s 2022 sales.

A 68 per cent decline in operating profit to £24.1mn also reflects the fact that it has been building inventory at new sites and incurring one-off restructuring costs as it shuts down older factories. The most worrying number, though, was the increase in net debt, which increased from £5.9mn (excluding leases) to £93.2mn by the year-end.

There is still a very good long-term investment case to be made for Forterra's shares, with the UK’s production capacity of 2.2bn bricks per year running below long-run demand levels. Its new and upgraded factories are also far more efficient in terms of energy and labour costs.

In the short term, however, demand remains weak and the company will incur a further £27mn of capex costs this year, most of which will be weighted towards the first half. Forterra has secured temporary increases in its leverage covenants with lenders, demonstrating the tight spot in which it finds itself. And although its price/earnings ratio is expected to fall from its current elevated rate of 18.2 times to 14 times in 2025 based on FactSet consensus estimates, this still doesn’t look like a bargain given the heightened risk. Hold.

Last IC view: Hold, 173p, 27 Jul 2023