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Date : 27/09/2021

Brickworks

ASX :

BKW

Market Cap : $3.89 Billion

Dividend Per Share : $0.61

Dividend Yield : 2.36 %

Hold

52 Week Range : $17.20 - $26.15

Share Price : $25.76

All 3 of Brickworks' business segments are performing extremely well. We recommend a "Hold".

Company Analysis

Brickworks (ASX: BKW) is one of Australia’s largest brick manufacturers. It comprises a diversified portfolio of attractive assets, offering shareholders stability and long-term growth. The Company has a proud track record, having paid a dividend every year since listing on the ASX in 1962. Brickworks comprises of four divisions – Building Products Australia, Building Products North America, Industrial Property, and Investments.

Building Products Australia includes Austral Bricks, the country’s largest bricks producer, and other leading brands such as Austral Masonry, Austral Precast and Bristile Roofing. Building Products North America is the leading brick producer in the north-east of the United States and includes the flagship brand of Glen-Gery. On surplus land assets, Brickworks has developed extensive industry property assets in conjunction with Joint Venture partner the Goodman Group. These facilities help our customers to meet the supply chain needs of the growing digital economy.

Brickworks also has a long-standing investment in Washington H. Soul Pattinson, a diversified investment house and ASX100 company. This investment has delivered outstanding returns for the company and provides stability and growing cash dividends.

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Source: Tradingview.com

Brickworks has been a solid performer since our Buy recommendation back in January 2021 at a price of $19. Since then, BKW shares have returned 35.5% since then and has also yielded a dividend of $0.21 cents in April and another impending dividend of $0.40 in November – taking the full year dividend yield to fully franked to 2.4%.

Brickworks’ operations have been impacted recently due to the lockdowns in Australia. In North America, there have been ongoing impacts due to the pandemic throughout the year, and yet, given the strong infrastructure spending in Australia and North America, and the boom in property prices, Brickworks has delivered a positive FY21 financial performance.

Brickworks announced a record underlying Net Profit After Tax (NPAT) from continuing operations of $285 million for the year ended 31 July 2021, up 95% from the prior year. Including the impact of significant items and discontinued operations, the statutory NPAT was $239 million, down 20% from the prior year, which included a large one-off profit in relation to the Company’s investment in WHSP. Underlying earnings before interest, tax and depreciation (EBITDA) from continuing operations was $453 million, up 61%. Including depreciation and amortisation, EBIT was $383 million, up 86%.

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Source: Brickworks

Property Segment Shines

A joint venture with Goodman Group ensures exposure to valuable industrial and commercial property. Brickworks, which owns 50% of the venture, can claim profits from developments, higher property values, and rents.

Property delivered a record full-year result, generating EBIT of $253 million, due primarily to earnings from the 50/50 joint venture property trust with the Goodman Group (“Property Trust”). Property Trust assets were revalued during the year, and this resulted in another strong revaluation gain of $149 million. In addition, a land sale profit of $52 million was recorded, primarily relating to the recognition of unrealised profits associated with the prior sale of Oakdale West, after a number of lease agreements became unconditional. Brickworks share of the net rental income increased by 3% to $31 million. Total assets held within the Property Trust now stand at almost $2.7 billion. After including debt, Brickworks’ share of net assets was $911 million at the end of the year, up by another $184 million.

It has been a stunning year for Property, with record earnings and continued strong growth in the value of the Property Trust. Unprecedented customer demand for industrial property has resulted in lease pre-commitments ending the year at a record level. The rapid growth in online shopping has increased the importance of well-located distribution hubs and sophisticated supply chain solutions. This was highlighted by a number of significant industrial property transactions in western Sydney over the past 6 months, with the pricing of these transactions underpinning the valuations of the firm’s high-quality portfolio.

The contribution from the Property Segment during the year was thus stellar. Within the Property Trust, net trust income increased by 3% to $31 million and development profits of $24 million were recorded on the completion of facilities at Oakdale South and Oakdale East. In addition, property sales contributed a $52 million profit during the year. This was primarily due to the recognition of previously unrealised profits associated with the prior sale of Oakdale West, after the lease agreements with a number of tenants became unconditional.

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Source: BKW

The total value of leased assets held within the Property Trust was $2 billion at the end of the year. The Property Trust also holds a further $686 million in land and infrastructure that is currently under development. This increased significantly over the year due to development works at Oakdale East and Oakdale West. Including the development land, the total value of assets held within the Property Trust was $2.7 billion at the end of the year. Gearing within the Property Trust was down to 32% at the end of the period. After including borrowings of $845 million, total net asset value is over $1.8 billion. Brickworks’ 50% share of net asset value was $911 million as of 31 July, up by $184 million during the year.

Building Products delivered a Mixed Bag

On relatively steady revenue of $687 million, Building Products Australia EBITDA was up 7% to $97 million for the year, and EBIT was $44 million, up 36%. The higher earnings were primarily due to a broad-based reduction in operating costs, supporting improved margins across all business units and regions.

Early in the financial year, sales were subdued, due primarily to disruptions and uncertainty at the start of the pandemic. However, as the year progressed, demand improved in response to the government stimulus measures put in place to boost housing activity across the country. While Sydney and Melbourne sales were stifled, the performance of Austral Bricks in Queensland was a stand-out, with a significant uplift in earnings driven by increased detached house building, market share growth, and strong operational performance of the Rochedale plant following upgrade works completed over the past few years.

In North America, on marginally lower sales revenue of US$152 million, Building Products North America EBITDA was up 10% to US$20 million (AU$26 million) for the year, and EBIT was down 6% to US$6 million (AU$9 million). Building activity in Glen-Gery’s key non-residential markets was lower, with sales activity across several states being restricted for various periods during the first half.

The revenue and earnings delivered in the financial year 2021 were significantly impacted by the pandemic, and do not accurately reflect the rapid growth phase currently underway and the significant achievements of the North American business over the past twelve months.

In August, Brickworks announced further expansion in the US, with the acquisition of IBC for US$51.1
million (AU$70.0 million), the leading brick distributor in Illinois and Indiana.
This will significantly increase the scale of the direct distribution network, increasing Brickworks’ store count from 10 to 27.

IBC has delivered consistent earnings for several years, with significant growth opportunities and cost synergies available to Brickworks. Sales volume through the IBC network will underpin production volume at the Midwest plants, which have ample capacity to accommodate additional sales growth. The acquisition is expected to deliver 2% EPS accretion in year 1, excluding cost synergies and growth initiatives.

Since Brickworks entered the US market about a year ago, the firm has made three additional bolt-on acquisitions and is operating an aggressive growth strategy.

The Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) Investment

WHSP is an investment house that has a large investment portfolio in different sectors like telecommunications, building products, resources, and property. It is one of the best businesses on the ASX and its portfolio consists of well diversified assets with robust growth trajectories. As we mentioned earlier, Brickworks is one of the majority shareholders in WHSP and this provides Brickworks with a solid stream of income and return on investment, consistently.

Earlier this year, WHSP announced a proposed merger with ASX listed investment company Milton Corporation. Following the merger becoming effective just last week, it has created a diversified investment company with a total net asset value of over $9 billion. Due to the addition of new MLT shareholders to the register, Brickworks share of the larger WHSP will reduce to 26.1% (previously 39.4%). However, in the new register, Brickworks is now the largest shareholder in the enlarged WHSP, and the investment now has a current market value of $3.4 billion.

The merger will trigger a one-off non-cash profit to Brickworks, due to the deemed disposal of WHSP shares. This profit is expected to be in the range of $375-425 million (after-tax) and will be recorded in the first half of the 2022 financial year.

Long-term outlook remains robust

Given the impacts lockdowns are having on Australia at the moment, the construction industry in Queensland, South Australia and Western Australia are likely to see some interruption in the short term, as they look to reopen amid the ongoing coronavirus pandemic. As the country opens up next year, a minor impact is expected and this sentiment has been relayed by Managing Director of Brickworks, Lindsay Partridge as well – indicating that the firm is well prepared for any short-term impacts.

In a medium to long-term view however, Brickworks is in a strong position, with conservative gearing and a diversified portfolio of attractive assets. Development activity within the Property Trust is continuing at an unprecedented scale. This includes the construction of new facilities to meet lease pre-commitments across Estates in Sydney and Brisbane. The completion of these facilities within the next two years will result in gross rent within the Trust increasing by around 60%, with significant further land remaining for development.

Within Building Products Australia, underlying demand across the country is strong, with a large backlog of detached house construction work in the pipeline. In New South Wales, sales in the first two months of the financial year have been impacted by the latest outbreak of COVID-19, however, the report from Mr Partridge suggests that despatches are now back to around 90% of the level immediately prior to the outbreak. In response to the increasing sales, Brickworks have re-started their second kiln at Plant 3, Horsley Park, that had been temporarily shut down in late July.

In North America, sales momentum is gathering. Assuming there are no major disruptions caused by the pandemic, we expect higher earnings from this business in the 2022 financial year, driven by improving sales volume, the benefits of prior period plant rationalisation and upgrades, the investment in sales and marketing initiatives, and the additional contribution from IBC.

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The big jump in EBITDA margins during FY21 was a direct result of property revaluations amid soaring property prices. Property segment’s EBITDA saw a jump of 95% to $253 million. We do not expect another year where property prices will see ridiculously high jumps, but there will be modest growth in property prices as a result of increased demand for industrial and commercial properties.

Brickworks is on the verge of its best year as far as its Bricks segment is concerned. Given how their investments are doing exceptionally well, the three segments are synchronised for a post pandemic boom, not just here in Australia, but in North America as well. We think the North American division is now a better business than the Australian one, given the robust growth we are likely to see in the USA as a direct result of Biden’s trillions of dollars of infrastructure spending.

Hence, we estimate revenues to expand by about 20% in FY22 and then revert to its mean. EBITDA margins are expected to be on the higher side at about 34-35%.

The valuation reflects the above revenue and earnings forecasts. The high valuations is supported by expected profits across all three segments and a growing asset base. We think Brickworks is fairly priced at these levels and the current multiples reflect the robust growth it is expected to have post pandemic.

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Consistent Increases to Shareholder Value

Brickworks is a part of the few ASX companies that have delivered consistent shareholder value – both in terms of dividends and capital gains. It has been 45 years since normal dividends last decreased, or in other words, Brickworks normal dividends have been maintained or increased since 1976. In FY21, the total dividends came up to $0.61 a share – reflecting a 3.4% increase over FY20. In addition to dividend growth, Brickworks also has a strong history of total value creation. Based on the share price at the end of the financial year, the Company has delivered shareholder returns of 13% per annum for 53 years, incorporating both dividends and share price appreciation.

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Source: BKW

Recommendation

Brickworks has benefitted handsomely from the booming property market and the returns that have been delivered from its investment in WHSP. The building products segment is poised for one of its best years as the growth outlook is robust in Australia and North America. Thus, the three segments are synchronised for a post pandemic boom. The company has consistently delivered on dividend growth and increasing shareholder value. A stellar FY22 is expected and BKW shares are fairly priced. We recommend long-term investors to “Hold” their positions.

 

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