LONDON (ShareCast) - (ShareCast News) - Analysts at Numis Securities took a look at the current position of the brick industry in the UK on Tuesday, concluding that while sales volumes across the nation were expected to remain "broadly flat", supply and demand dynamics remained attractive, and forecast higher prices too.
"Looking to 2018, despite an expected increase in UK production, we believe that sales volumes by UK manufacturers will be flat (as 2017 was augmented by sales from inventory, which we do not think can repeat). We, therefore, expect demand growth to be met by an increase in imports, and this dynamic has historically led to higher brick prices," the report read.

Indeed, Numis added it would "not be surprised" to see average 2018 brick price inflation in the mid-single digits, indicating share price upside for the likes of Ibstock and Forterra.

Christen Hjorth, along with the co-authors of the industry review, said she believed that it was likely that growth for UK brick producers would be a mirror image of 2017, but noted that there were important mix dynamics to account for.

For example, higher prices would be achievable in the housebuilding end market in comparison to the repair, maintenance and improvement segment.

In the same report, Numis indicated that Ibstock would likely outperform the industry with sales growth of 1%, projecting 5% growth at Forterra, driven by planned increases in available capacity. In parallel, the firms were expected to achieve average price increases of 4% and 4.9% over the year, respectively.

Hjorth wrote, "Our industry analysis suggests that our forecasts for both companies are set at a prudent level, albeit with more upside risk for Forterra. Note that we leave our 2018 profit forecasts unchanged at this early stage of the year."

"Driven by our peer group analysis, we believe that an average 2019 P/E ratio of 12.5x for the brick sub-sector is attainable on a one-year view. Based on this and an assumed 5% P/E ratio discount for Forterra (to reflect Ibstock's larger scale/liquidity), we set our target price at 288p/share for Ibstock (from 270p) and 335p/share for Forterra (unchanged). This suggests 15% and 19% upside, respectively, and we, therefore, maintain our Add recommendations for both companies."

As of 1230 GMT, Ibstock shares had slipped 2.28% to 239.80p, while Forterra had declined 3.51% to 267.29p.

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