Britain’s two largest clay brick manufacturers are in line to rebound following the election analysts at Canadian bank RBC believe.
Ibstock PLC (LSE:IBST) and Forterra PLC (LSE:FORT) have been knocked by the slowdown in UK housebuilding, causing demand for clay bricks to fall to levels not seen since the global financial crisis.
Ibstock has a share of the market of 42% and Forterra 28% respectively, but if housebuilding revives after the election share prices of the pair too might recover, RBC suggests.
“The ongoing downturn is cyclical. The key structural driver remains firmly intact which is a shortage of housing in the UK, further exacerbated by the depressed run rate of housing completions.
“While there are also supply-side housebuilding bottlenecks such as planning, land and labour, the upcoming UK General Election on 4 July could spur policy changes.”
Brick manufacturers have high operating leverage, with over 50% fixed costs, RBC adds.
"Mothballing is often the defence of choice in down cycles as it limits inventory build and protects brick prices.
"We think 2024e adj. EPS for Ibstock and Forterra will trough at c.65% and c.70% below 2022, respectively.
“There are reasons for optimism in the UK housing market with moderating inflation, impending bank rate cuts, resilient house prices and rising housing registrations (NHBC).
"A Labour government could also lead to a significant increase in housing supply over the coming years.
"What is our base case? We expect UK clay brick volumes to recover at an 11% 2024e to 2028e CAGR [annual sales growth] driven by housing completions (5%) and a customer restocking cycle.
“In our view, this will drive a restocking cycle, whilst supporting prices.”
Ibstock shares jumped 4.7% to 173.4p and Forterra 5.7% to 173.8p.