Market Recovery Will Boost Demand, Supporting Desford And Wilnecote Expansion Projects

Key Takeaways

• Project Rebound and completed CapEx projects aim to enhance production capacity and revenue growth, positioning Forterra well for market recovery.
  
• Strategic entry into the brick slips market and sustainability efforts like solar power adoption suggest gains in revenue, margins, and operational efficiency.
  
• High debt and cost inefficiencies, combined with flat revenue and market pressures, threaten financial stability and long-term profitability.

Catalysts

Engages in the manufacture and sale of building products in the United Kingdom.

• Project Rebound aims to swiftly increase production capacity in response to surging demand, enhancing revenue growth through better utilization of existing assets.
  
• The completion of major CapEx projects at Desford, Wilnecote, and Accrington, particularly the increased capacity of Desford and Wilnecote, is expected to drive significant revenue and earnings growth by positioning Forterra well as the market recovers.
  
• Strategic expansion into the brick slips market with Accrington's facility, offering a new product line and capturing a larger share of a growing market, could positively impact revenue and margins due to high demand for sustainable façade solutions.
  
• Significant progress in sustainability initiatives, such as reducing carbon emissions and operating costs with solar power and innovative technologies like calcined clay, suggests opportunities for improved net margins through operational efficiency gains.
  
• Favorable market conditions, driven by a recovery in the U.K. housing market, along with improved planning processes, are expected to bolster demand, thereby enhancing revenue and earnings potential.

Forterra Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Forterra's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 8.2% in 3 years time.
• Analysts expect earnings to reach £35.5 million (and earnings per share of £0.17) by about April 2028, up from £17.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £40 million in earnings, and the most bearish expecting £27.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.7x on those 2028 earnings, down from 21.4x today. This future PE is lower than the current PE for the GB Basic Materials industry at 21.2x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.84%, as per the Simply Wall St company report.

Forterra Future Earnings Per Share Growth

Risks

• The company's net debt before leases is high at just below £85 million, which is 1.9x EBITDA, indicating a potentially risky debt burden that could impact net profit margins and financial stability.
  
• Despite a reported increase in H2 revenue, full year revenue was flat, suggesting challenges in sustaining consistent revenue growth, which could impact earnings in the long term.
  
• The business faced increased borrowing costs and interest rates, reducing profitability and potentially impacting net margins and profit after tax.
  
• Persistent cost inefficiencies due to operating at only 60% of capacity result in increased fixed costs burden and reduced net margins, affecting overall profitability.
  
• Market conditions have led to lower margins in certain segments, such as Bespoke Products, where selling price pressure has restricted the ability to recover cost volatility, further impacting net margins.

Valuation

• The analysts have a consensus price target of £2.097 for Forterra based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £3.2, and the most bearish reporting a price target of just £1.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £433.9 million, earnings will come to £35.5 million, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 7.8%.
• Given the current share price of £1.78, the analyst price target of £2.1 is 15.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.