Forterra (FORT) chief financial officer Shatish Dasani says the business will continue reducing debt in a bid to ensure it can withstand a potential future downturn in its cyclical brick manufacturing market.

Forterra joined the stock market in April as the most leveraged of the three brick makers on the London market, which prompted a sell-off in the company's share price following the UK's vote to leave the EU.

Investors were worried weaker demand in new-build housing and repair, maintenance and improvement (RMI) markets could hit profitability, an issue which would be magnified at Forterra by its relatively high debt load.

In a call with Shares following half-year results published this morning, finance officer Dasani said Forterra was already making progress on delivering a more robust balance sheet.

Net debt at 30 June 2016 was £190 million versus trailing 12 month earnings before interest, tax, depreciation and amortisation (EBITDA) of around £106 million, according to today's half-year results update.

Net debt-to-EBITDA fell to 1.8, down from 2.2 at the end of 2015.

'We've said previously our long-term target is to go below 1.5 times net debt-to-EBITDA,' said Dasani in a call with Shares.

'That will be a good level for us and we continue towards that in the second half. We did sensitivity analysis in terms of volume reductions and the business is pretty resilient in being able to take cost out, so with a small reduction in volume we would be able to maintain profitability and margins.'

Forterra's lenders also have covenants in place on its debt, a standard practice, which means the business must deliver certain levels of profitability to avoid being in breach of the agreements.

'In terms of covenants, we are required to be less than 3.5 times net-debt-to-EBITDA and we are quite comfortable with that,' said Dasani.

'It gives us some flexibility to be able to expand the business where there are opportunities.'

Today, Forterra's management provided an upbeat view on end-markets, saying excess industry inventories built up over the last couple of years are starting to return to normal.


Chief executive Stephen Harrison said high demand for bricks after the introduction of the government's Help to Buy scheme in 2013 caused a temporary shortage in the UK, which then turned into a glut as customers bought more than they needed.

'There are a number of things which have affected inventories,' said Harrison.

'There was a one-off situation where the industry had reduced inventory through the downturn which, for us, was basically five years from 2008 until when Help to Buy was introduced in 2013.

'Inventories fell during that period and there was a perception that there was a brick shortage which meant customers were buying forward and above their requirements.

'So 2013 to 2015 was an abnormal position, with customers reacting to a perceived shortage and buying forward so they could keep building. More recently, that demand has reversed from builders and distributors.

'In terms of the industry in total, there will be around 1.8 billion bricks produced this year – that's public information. Stocks are around 600 million, so as an industry we are carrying around four months' of stock and we'd expect that to stay between three months and five months.

'When the shortage occurred there were around two months' worth of bricks on hand. Where the stocks are now feels about right and we would expect them to stay in that range.'

After a period of buying ahead of their requirements, builders and distributors are working through their own stocks and buying less from Forterra, part of the reason revenue at the half-year stage declined 3.2% to £146 million.

'Revenue was broadly solid and we have seen some signs of uplift from the volume house builders but following over-purchasing in 2014 and 2015 we are still seeing some distributors de-stocking,' said Harrison.

'Our sales into them are slightly slower than their sales out and we expect to see that wash through this year.'

Shares in Forterra trade 1.2% higher at 166p, valuing the Northampton-headquartered business at £337 million.

'Forterra's interim results demonstrate its increased focus on cost management in an uncertain demand environment,' writes analyst Barry Dixon at investment bank Davy.

'The continuing growth in volumes in July and August, however, is reassuring and further confirms the low immediate impact the EU referendum has had on the housebuilding sector.

'With our full-year forecasts now looking more secure, the stock's low rating is all the more attractive.

'For now, however, we prefer to play this theme through Ibstock (IBST).'

Prior to today's update, which looks slightly ahead of expectations, consensus analyst estimates had been for full-year earnings per share of 21.57p, falling to 20.54 a year after.

Issue Date: 07 Sep 2016