Forterra (LON:FORT) shares have been slumping recently. Some of this can be attributed to the general sell off in UK equities at the moment, but what was starting to look like a solid surge from around £2.70 has petered out after the recent peak of £3.71 this week. Could there be more momentum ahead, or is it time to get out of Forterra stock?
Here at The Armchair Trader we are still lukewarm on the UK construction industry. Yes, there is a housing shortage, and yes the uncertainty of Brexit has been holding back UK house prices, but that does not mean we are on the cusp of an epic construction boom.
Will virus slow down expected UK construction boom?
Factor in the unwanted attentions of the coronavirus and its potential impact on the UK economy, and it does not look like right now is the time to be backing a company like Forterra. In its update to the market last month Forterra admitted that it had been facing challenging conditions in 2H 2019 (read: Brexit) but was cautiously upbeat about prospects for 2020.
This was before the coronavirus began to show up in force, of course.
Forterra is going to be announcing full year results on 10 March. Forterra will be reporting on a period that was not especially rosy for the construction and house building sectors. On top of that, it is not the sort of defensive stock we like to be holding during what is shaping up to be a period of extreme market volatility.
Forterra shares have many positive aspects
Positives? I would not pin anything on a housing boom that may not materialise in the first half of this year, but there is a admittedly a shortage of brick supplies in the market and a potential dislocation in trade and international supply chains could play to Forterra’s favour. A new factory is also promised in Desford which could be making 180 million bricks a year.
There is also plenty of government bluster about new home building. If the UK is forced to rely on locally sourced bricks to build this swathe of new homes, then Forterra could be well positioned.
Forterra has also been raising its dividend and has a history of producing cash in recent years, so those in the hunt for yield may want to give it a look.
UK housing ready to make up lost ground
UK house prices have been on the march recently – the Zoopla UK Cities House Price Index saw UK urban house price inflation in January up 3.9%. Zoopla also said that growth in supply had not kept pace with demand. There is a need for new housing stock in the UK and the government knows it has to find a solution to this.
Forterra does look like an excellent proxy for the anticipated growth in the UK housing construction market, hence the rise in its shares. We suspect many investors would shrug off results that were based on last year’s artificially depressed UK economy.
Forterra shares are coming off recent highs, however, which means now may not be the time to dive in. We are taking a cautious view on UK construction for the time being as all bets are off until we see how the coronavirus plays out in the UK. It could significantly delay the so-called Boris Bounce. If anything, it will mean that Forterra stock could end up being cheaper to pick up later in the year. One to watch.