Forterra, Inc. (NASDAQ: FRTA): Forterra is a leading manufacturer of water and drainage pipe & products for a variety of water-related infrastructure applications. Based in Irving, Texas, it employs more than 5,500 people and operates 101 facilities, with products available throughout the U.S. and Eastern Canada.
The company has significant opportunities to enhance its business risk profile in 2018 and beyond, with the USA’ infrastructure spending plans, divestiture of the U.S. concrete and steel pressure pipe assets, procurement initiatives, SG&A cost savings initiatives and corporate cost reductions all support expectations for a significant improvement in 2018.
Moreover, U.S. President Donald Trump said his infrastructure plan would result in about $1.7 trillion in overall investment. Trump previously valued the program at $1 trillion. Also, The Trump administration has said a major element of its plan will be streamlining environmental reviews and fast-track permitting for projects, leading to reduction in approval timeline and controlling time overruns in the infra projects. Therefore, moving forward, the company continue to expect to see increasing infrastructure spending as it heads into 2018. The management believes that the fundamental need for infrastructure investment in the U.S. including both highway and municipal water projects is higher than ever.
Driven by abovementioned factors, several equities research analysts recently issued favorable reports on FRTA shares. On average, the consensus target is $13.29 over the medium term.
On November 8th, the company announced results for the quarter ended September 30, 2017. During the quarter, Forterra faced several operational issues (Including hurricanes Harvey and Irma) that adversely impacted its performance. The company also closed the sale of its U.S. concrete and steel pressure-pipe business during the quarter. That divestiture reduced sales by $8.9 million, and the company recorded a $31.6 million loss on that transaction, which is what pulled it into the red.
While these factors created headwinds for the company this year, FRTA’s demand outlook remains extremely promising against the backdrop of improving economic fundamentals and demand situation. Continued residential housing growth and enhancing funding initiatives are expected to support highway infrastructure projects. Furthermore, the backlog in the water and drainage segments remained solid and Supports Company’s outlook for the longer-term growth.
If we factor in all these headwinds, Forterra reported a reasonable set of numbers. Third quarter 2017 net sales increased to $444.3 million, compared to $441.1 million in the prior-year quarter. Net loss for the quarter was $11.5 million, compared to net income of $8.4 million in the prior-year quarter.
The results demonstrate the company’s resilience and its ability to successfully execute on multiple objectives on a sequential quarter basis, including higher selling prices, lower costs, and improved earnings. Additionally, in spite of the impact of two major hurricanes, Adjusted EBITDA was above the mid-point of its guidance range. The company would be announcing fourth quarter and full-year 2017 financial results before the market opens on Wednesday, March 7, 2018.
About the company: Forterra is a leading manufacturer of water and drainage pipe and products in the U.S. and Eastern Canada for a variety of water-related infrastructure applications, including water transmission, distribution, drainage and stormwater management.
Based in Irving, Texas, Forterra’s product breadth and significant scale help make it a one-stop shop for water-related pipe and products, and a preferred supplier to a wide variety of customers, including contractors, distributors, and municipalities.
Product Profile: The Company has a national Scale with Diversified Exposure Across Products and End Markets.
Strategic Exchange of Assets: On Feb 1st, 2018, the company announced that it completed a transaction to exchange certain of its drainage assets in Alabama, Georgia and Tennessee for assets owned by Foley Products Company in Mississippi and Texas plus $10 million in cash. While not expected to be material to Forterra’s financial results, the transaction reflects the Company’s continued focus on portfolio management to deliver long-term value by enhancing its position in well-structured markets.
The outlook for the near term:
- The guidance range anticipates delivering an improved year over year Adjusted EBITDA margin variance in Q4 2017 as compared to the prior quarter
- Net loss for the fourth quarter of 2017 expected to range from $16 million to $13 million and Adjusted EBITDA expected to range from $20 million to $25 million
Management’s preliminary Thoughts on 2018
The management expects to see significant improvement in year over year results in 2018 reflecting the anticipated benefit of:
- USA government’s, projected budget of $1.5 trillion in infrastructure improvements over ten years. Additionally, The administration will seek to release the proposal to upgrade roads, bridges, airports and other public works
- Higher expected average selling prices
- Input cost inflation mitigated through the procurement initiatives
- Lower operating costs in Drainage resulting from the reorganization
- Lower corporate costs due to lower professional fees and other G&A cost savings initiatives
Industry overview and market opportunity for the company:
- The U.S. market size for drainage and water transmission pipes is estimated to be $20 billion by 2020, representing 7-8% per year growth
- Over 40% of infrastructure spending is on highway and street, water supply and wastewater projects
- Expect to see the benefit of accelerating pace of Fixing America’s Surface Transportation Act (“FAST Act”) spending
- Underinvestment in municipal water infrastructure supports longer-term expectations for demand growth
- Outlook for single-family housing starts by state shows high single-digit to double-digit growth in 2017 in large states where Forterra has a significant presence including California, Pennsylvania, Florida, Georgia and Texas
- ~ 30% of commercial construction spending is driven by new construction starts – expect to see continued stable growth during the more mature phase of expansion in the current economic recovery cycle
Third Quarter 2017 Financial Results:
Revenue and Profitability:
- Third quarter 2017 net sales increased to $444.3 million, compared to $441.1 million in the prior-year quarter.
- Net loss for the quarter was $11.5 million, or a loss of $0.18 per share, compared to net income of $8.4 million, or $0.19 per share, in the prior-year quarter.
- Adjusted EBITDA for the third quarter was $60.9 million, compared to $80.4 million in the prior-year quarter.
- On September 30, 2017, the Company had cash of $41.1 million and outstanding debt on its senior term loan of $1.2 billion. As of September 30, 2017, there was no outstanding balance on the Company’s $300 million Revolver following an $80 million net pay down during the quarter.
Key risk factors and potential stock drivers:
- The working capital requirement is relatively large, as is inherent in this industry. Sustained efficient working capital management as the business grows, would be a key sensitivity factor for the company.
- The financial risk profile should improve supported by better working capital management, monetization of non-core assets, and improving cash accruals/profitability.
- Forterra’s do not have much debt getting due immediately; therefore, the company has time to turn itself around. If it can do so, it would lead to significant upside.
- Weakening of the financial risk profile due to slower than expected pace of operating performance improvement, or significant, debt-funded capital expenditure could adversely affect the sentiments.
- Vulnerability to volatility in raw material prices is likely to persist over the medium term, given the limited flexibility to pass on price increases owing to competition.
- Also, the company is exposed to risk related to environment and adverse weather situations.
- On Thursday March 1st, 2018, FRTA was at $7.14 on volume of 270K shares exchanging hands. Market capitalization is $460.30 million. The current RSI is 39.45
- In the past 52 weeks, shares of FRTA have traded as low as $3.02 and as high as $20.60s
- At $7.14, shares of FRTA are trading below its 50-day moving average (MA) at $8.99 and near its 200-day MA at $7.37.
- The present support and resistance levels for the stock are at $6.85 & $7.99 respectively.
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