Shareholders in Forterra (LSE: FORT) have suffered a brutal downtrend in the share price.
Over the past year, the clay and concrete building products manufacturer is down by just over 40%. But with the share price near 158p, the business displays decent value against traditional indicators. And earnings look set to rebound in 2024.
One of the risks of holding Forterra in a portfolio is that its business is exposed to the general cyclical movements of the wider economy. And earnings are forecast to plunge by around 26% in 2023.
May’s trading update underlines the recent challenges in the business. And it covers the four months to 30 April.
Rising costs and falling demand
The company has been grappling with higher costs because of inflation and the energy price shock. However, demand for its products has also been lower and revenue plunged by around 24% in the period. And the result of those conditions has been a pincer-squeeze on profits.
But looking ahead, the directors said the cost base is stabilising, although inflation still persists in “certain categories”. Meanwhile, the company has secured around 80% of its energy requirements for 2023, but at higher rates than last year.
My read is that costs look set to be higher but manageable.
Meanwhile, the directors think market conditions will improve as the year progresses. The firm’s customers had been reducing their inventory levels, and that was a “major factor” in the poor performance of the business. But the situation looks set to ease going forward with customers buying again.
And the second half of the year will likely produce better results than the first half has. The directors also pointed to improving housebuilder reservation rates as a cause for optimism and a better outlook for the rest of 2023 and 2024.
New production efficiencies
Meanwhile, the company has started production from its new brick factory in Desford. And it stopped using its old one in March. Chief executive Neil Ash said the new facility will provide “industry leading efficiencies”.
But in the short term, the company is also managing costs by mothballing another of its brick factories at Howley Park.
Together, the changes should deliver a reduction in annualised fixed costs of around £10m. And going forward, the firm expects to make sure its cost base is “aligned to market conditions”.
Ash thinks the company is well-placed to meet the short-term challenges it faces. And the directors are “confident” about medium- to long-term fundamentals of the markets the business serves.
Ash also said there’s a longstanding shortage of housing supply and strong cross-party political support for housebuilding. But on top of that, there’s a long-term deficit of domestic brick production capacity. And such factors will likely drive demand for the company’s production in the years ahead.
Meanwhile, the forward-looking earnings multiple for 2024 is just over 7.5 for 2024. And the anticipated dividend yield is above 7%.
I see that valuation as attractive and think the stock is well worth further research and consideration now.
