MIDAS SHARE TIPS: A perfect building block to cement your future wealth with brick maker Forterra

By JOANNE HART, FINANCIAL MAIL ON SUNDAY

Updated:

Britain needs bricks. The country uses 2.4billion a year, but homegrown production sits at 2billion so we import 400million of these heavy blocks from abroad. The process is cumbersome, costly and a relatively recent development. 

Before 2008, UK firms produced about 2.6billion bricks a year. Then the financial crisis erupted. The property market crashed, demand for bricks dried up and companies either went out of business or reduced capacity. 

With the economy in trouble again, interest rates rising and house prices increasing at the slowest rate in years, one critical question looms over brickmakers today: will they suffer in the same way as during the last lockdown? 

Safe as houses: Forterra, which has a brickworks in Peterborough, above, makes a product that is much in demand

Safe as houses: Forterra, which has a brickworks in Peterborough, above, makes a product that is much in demand

Share prices across the industry suggest widespread lack of confidence among investors. 

Forterra is one of the country's biggest brickmakers. The company floated on the stock market at £1.80 in 2016 and by February 2020, the shares had more than doubled to £3.70. Today, they are £2.64. 

This decline seems unjustified. Forterra produces about 500million bricks a year and sells everything it makes. 

Customers include large builders' merchants, such as Travis Perkins and Jewson, and major housebuilders, such as Persimmon, Barratt and Bellway. 

After the financial crash, these companies suffered terribly. Many had run up huge debts and embarked on ambitious speculative development sprees. 

But valuable lessons have been learnt from that time. Housebuilders are financially robust, they are not sitting on piles of vacant properties and the UK still suffers from a chronic lack of new homes. 

Importantly too, employment is still strong and mortgage rates remain low by historical standards. This all suggests that the property market should prove more resilient than in 2008. 

New homes need bricks and Forterra is at the top of the game. Even if new-build activity slows down, the company has other levers to pull. When wallets are under pressure, homeowners often turn to extending properties rather than moving. 

Niceto-have refurbishments – such as upgrading a kitchen or installing a top-range shower – may fall back, but plenty of building work fits more into the need-to-have category – creating space for growing families, for example. 

Bricks come in all shapes and sizes and Forterra owns several varieties, including the London Brick Company, which can be found in 20 per cent of all homes in England. 

The bricks are made in a traditional, labour-intensive fashion so new properties use different varieties, made with more efficient techniques.

But older homes were made with London Brick and most of them are still standing today. This gives Forterra one great advantage – every time the owners of older properties want to extend their homes, London Bricks are the ones to use. 

The group's bricks are primarily used in homes, but Forterra makes concrete products too, used in car parks, hotels and hospitals such as University College London and Alder Hey Children's Hospital in Liverpool. Even Wembley Stadium turned to Forterra for its concrete. 

Forterra is highly cash generative, which allows chief executive Stephen Harrison to pay an attractive and growing dividend. 

The group owns all of its assets, including 2,000 acres of land and 17 factories around the country so there are no pricey rent or leasing bills to pay. 

And Harrison has been able to pass on rising energy and labour costs to customers, recently increasing prices by more than 25 per cent. 

Harrison is confident about the future. The company is expanding capacity, with a new brick factory near Leicester, which will be the largest in Europe and among the most efficient. 

The group is investing in bricks more suited to commercial sites too, and moving into brick slips – used in blocks of flats and individual homes to make them look more attractive. 

Analysts expect a 26 per cent increase in sales to £466million this year, with profits up 29 per cent to £65.5million. 

The pace of growth is expected to slow in 2023, but brokers remain optimistic that Forterra's figures will move in the right direction. 

A 14.3p dividend is pencilled in for the current year, rising steadily thereafter. The company is also buying back its own shares, which should feed through into higher dividends. 

Midas verdict: Forterra shares have suffered from unease about the UK's economic prospects but, at £2.64, the stock looks good value. This is a solid, well-run manufacturing company, making products that the country needs and offering a generous 5 per cent-plus dividend yield to boot. Buy. 

Traded on: Main market Ticker: FORT Contact: forterra.co.uk or 01604 707600 

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