With housebuilding demand on course to keep rising in the years ahead, I am backing Forterra (LSE: FORT) to generate exceptional profits growth for many moons to come.
Build rates in the UK have been lagging requirements for decades now, and politicians are only really beginning to cotton on to the scale of the problem as ‘Generation Rent’ swells in numbers. The Conservative government has vowed to take fresh measures to remedy the housing shortfall and it will need to maintain this commitment as it battles against falling voter numbers. And this bodes well for sellers of building materials like Forterra.
Indeed, the country’s second biggest provider of bricks, plans to fully utilise this favourable backdrop by dealing with bottlenecks at its facilities, while it is also drawing up plans to construct a jumbo new brick manufacturing facility.
The Northamptonshire business is already enjoying strong demand for its heavy construction products as housebuilder activity chugs steadily higher. It saw revenues rise 12.4% — or 10.4%, excluding the acquisition of precast concrete specialist Bison last year — to £331m. It said that this bubbly result was “due to strong demand in the new-build residential market leading to [a] double-digit increase in brick and aggregate block volumes.”
And critically, while Forterra is battling against a rising cost base, the positive market fundamentals are allowing it to successfully pass these larger expenses onto its customers.
Brick beauty
Against this backcloth City analysts are expecting the small-cap to deliver solid earnings growth of 8% in both 2018 and 2019. This, combined with the Forterra’s surging cash flows — operating cash flow jumped to £90.2m last year from £69.8m in 2016 — is expected to keep dividends swelling at a splendid pace too.
Last year’s 9.5p per share reward is anticipated to rise to 10.5p in the current period and again to 11.5p in 2019. Consequently investors can drink in chunky yields of 3.4% and 3.7% for this year and next respectively.
Despite its bright profits picture, Forterra deals on a forward P/E ratio of just 11.8 times. This makes it an irresistible pick right now, in my opinion.
Marketing star
Communisis (LSE: CMS) is another dirt-cheap small-cap on course to put out meaty dividends in the near term and beyond.
An anticipated 6% earnings improvement in 2018 leaves the company trading on a prospective P/E multiple of just 9.1 times. This bright bottom-line outlook also gives rise to predictions of further dividend growth with a predicted 2.9p per share reward, which is up from the 2.66p paid out last year and carrying a stunning 4.7%.
The good news spills over into next year as well, with an anticipated 7% profits rise giving rise to an estimated 3p payment. This means the yield leaps to a chubby 4.8%.
Communisis is an important marketing partner with major companies all over the world, and its ability to keep grinding out long-running contracts with such businesses convinces me that it should remain a lucrative stock for years to come.