As predicted, Labour has won the 2024 UK election and the stock market is responding positively. Both the FTSE 100 and the FTSE 250 are up on the news.
But one of the biggest winners could be a UK stock that isn’t part of either index. Forterra (LSE:FORT) is a brick manufacturing company with a market cap of £380m.
Supply and demand
As part of its manifesto, Labour has promised to tackle the state of housing in the UK. A big part of this is the building of 1.5m new houses over the next three years.
That’s an average of 500,000 a year – far more than the 212,570 built in 2022/23. Those houses aren’t being built out of LEGO – it’s going to take a lot of real bricks.
The UK already suffers from undersupply in terms of production. And with bricks being heavy and expensive to ship around, there’s an advantage for domestic manufacturers.
That should be good for brick companies across the board, including Ibstock and Michelmersh. But I think Forterra’s recent investments mean it stands to benefit the most.
A commodity business
I think bricks are something of a commodity. People mostly don’t much care about who makes their bricks or where they come from – they care more about what they have to pay.
That means the most important thing is to be able to produce bricks at a low cost. And Forterra’s recent investments give it an advantage here.
The company opened a new facility in Desford last year, improving both its scale and its efficiency. That should give it an advantage in a commoditised business.
Falling construction output over the last year made Forerra’s investment look like a mistake. But the company might have positioned itself for very well for a boom in housebuilding.
What are the risks?
There are two main reasons to be sceptical of this idea. One is the targets for new houses look ambitious and the second is the company has made some bad mistakes recently.
The previous government aimed to build 300,000 new houses a year, but came up well short of this. That makes a target of 500,000 seem quite optimistic.
Moreover, Forterra has done some significant damage to its balance sheet lately. The firm has taken on debt to cope with the downturn in construction. This will have to be repaid.
To some extent, this is unsurprising for a business in a cyclical industry. But Forterra has done this while paying dividends to shareholders, which seems difficult to justify.
Is this a buying opportunity?
I own some of the shares in my portfolio and the share price has responded positively to the election result. That gives me something of a dilemma.
If the UK is really going to build 500,000 new houses annually, the company stands to do very well. But if it isn’t, the rising share price might be a chance for me to sell.
That’s the dilemma with Forterra shares. But with the stock 40% lower than it was five years ago, there could still be a buying opportunity here.
