The UK’s second-biggest brick maker Forterra (FORT) looks undervalued as its debt reduction plans progress ahead of schedule and demand from the housebuilding sector remains robust.

We recently added its peer Ibstock (IBST) to our Great Ideas portfolio and Forterra trades at a significant discount to its larger rival. While Ibstock is on a 2017 price-to earnings (PE) ratio of 11.3 times, Forterra trades on a 2017 PE of 8.7.

Robust full year results added to the recent momentum behind the shares and we think Forterra can close the valuation gap over time.

The size of the company’s borrowings had been a drag on performance but strong cash generation has helped reduced net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) from 2.2 times at its stock market debut in April 2016 to now sit at 1.3 times which is below its targeted ratio of 1.5 times.

Demand for Forterra’s bricks in the first two months of 2017 was ahead year-on-year. The company is guiding for a strong first half, with slightly more limited visibility in the second half period. Numis expects volume growth of 2% in 2017 and 3% in 2018.

Chief executive Stephen Harrison tells Shares he is confident on demand from the housebuilding sector given the solid dynamics underpinning the industry.

He is more uncertain about the RMI (repair, maintenance and improvement) space given current pressures on consumer spending. Encouragingly, historically more than half of the company’s business has come from new build homes.

Destocking process 'largely complete'

After a period in which the market became oversupplied, Government statistics show brick stocks are now down 14% on their most recent peak in May 2016 at 544m.

Forterra says that ‘destocking in the builders merchants’ supply chain is now largely complete’. In a demonstration of its confidence, the company plans to bring its Claughton plant back on stream by mid-year.

The facility was mothballed last summer in the wake of the Brexit vote and Harrison says the ability to bring it back online in the wake of more robust demand reflects a flexibility to respond to market conditions.

With debt largely under control, the company has the firepower to consider bolt-on acquisitions to add to its range of products and services.

Debt is no longer an issue and at 209p cash-generative Forterra looks undervalued on a single-digit PE.

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