Brickworks Ltd. (ASX: BKW) is engaged in manufacturing a range of building products. The Company is involved in the development and investment activities. The business segments include Building Products Australia, Building Products North America, Property divisions and Investments division. Building Products Australia manufactures vitrified clay, concrete and timber products used in the building industry. Building Products North America manufactures products lines including bricks and masonry blocks used in the building industry. Property division is engaged in the utilization of opportunities associated with land owned by the Company, including the sale of property and investment in Property Trusts. Investments division holds investments in the Australian share market, both for dividend income and capital growth, and includes the investment in Washington H. Soul Pattinson and Company Limited (WHSP: ASX: SOL).
Redland Brick assets’ acquisition: North America earnings up 122% FY2020
Brickworks acquired in February Redland Brick’s asset and reinforces its position in North America as a key-player in major cities such as New York, Washington DC, and Boston. Despite the COVID-19 crisis, BKW demonstrated its resilience and capabilities to generate earnings even in difficult time. FY2020 saw a surge in EBITDA by A$ 27M, up 122% year-over-year.
Property segment poised for stellar growth
Brickworks secured a pre-commitment lease for 20 years with Amazon through the Property Trust’s Oakdale West Estate in Western Sydney. We believe it is a wise move from BKW. Hence, e-commerce realised tremendous growth in 2020 and is likely to continue. Securing this tenancy demonstrates how BKW is well positioned to benefit from the advent of the e-commerce sector.
Solid stream of cashflow from (ASX: SOL) WHSP’s dividends supports future growth
Brickworks holds 39.4% stake in WHSP (ASX: SOL). WHCP’s share price surge by 17% since the last 3-month and by 36% in 2020. WHCP’s dividends yield of 1.98% (FY) provides to Brickworks a solid cashflow stream that supports the company’s long-term strategic plan. In FY2020, BKW received a total of A$ 56M of cash dividends. All in all, we believe Brickworks to have a solid portfolio of assets that bring diversity and reliable earnings even during cyclical downturns.
Economic and Sector review
Australia’s building products set for a rebound.
Since the first outbreak of COVID-19, September 2020 saw an increase in orders and sales for building products in Australia. According to Oxford Economics (2020), the Australian construction sector is expected to rebound by 7.1% in 2021 after a decline of 10.4% in 2020. Growth in the housing market is supported by the Australian state and federal incentives which offer an opportunity for first home buyers to purchase. Hence, we are anticipating stronger building activities over the next 6 to 12 months. On the other hand, the global construction industry outlook may not follow the same path of recovery. The on-going U.S. COVID-19 infections are well beyond 200,000 per day impacting the U.S. construction sector.
U.S. construction starts expected to improve by 4% in 2021
The uncertainty remains around the COVID-19 pandemic. On a positive note, business and consumer confidence is expected to improve upon the approval and distribution of vaccines and further fiscal stimulus anticipated for early 2021.
Revenue remains strong despite the pandemic crisis
Regardless of the impact of the COVID-19 and the uncertainty caused by the pandemic that forced Brickworks to shutdown plant, revenue continued to expand. Operating income went up by 32% from A$ 314.48 in FY2019 to A$417.12 in FY2020. Temporary closure of plants in response of COVID-19 cost to Brickworks A$ 10M.
|Significant items||Net A$ Mil.|
|Significant items relating to WHSP||317|
|Income tax from the carrying value of WHSP||(73)|
|Acquisition costs, net of “bargain purchase”||(9)|
|Tax benefit CARES Act (USA)||5|
|TOTAL (Continuing operations)||169|
Cashflow negatively affected by decrease in building products sales and tax payment on sale of WHSP shares
Cashflow from operating activities was down by 38.85% from A$123M in FY2019 to A$ 75M in FY2020 due to the decline in cash generation from lower building products earnings in Australia and tax payment on December 2018 sale of A$ 7.9M WHSP shares.
Net working capital up by 73% year-over-year FY2020
Goods inventory in continuing operations was down by A$ 21M in 2020 due to significant number of plants that went offline. The decline was offset by the Sioux City Brick and Redland Brick acquisition. Net working capital surge from A$ 233.2M to A$ 404.5M in FY2020, up 73% year-over-year.
BKW has had a very consistent dividend growth policy. The most recent payout was in November 2020 when the firm paid 39 cents of fully franked dividends.
The total dividend paid out in 2020 was 59 cents per share. Investors in the firm have not witnessed a decrease in normal dividend payout since 1976.
BKW reached all-time high on January 24, 2020 touching A$ 20.75 per share before falling to A$ 12 during the peak of the COVID-19 selloff in April 2020. BKW recovered impressively by 61% back to A$ 19 per share. Since October 2020, the price action consolidated in range between A$ 17.40 and A$ 20.33. The market is suggesting that buyers are entering the trade at A$ 19 as volume spikes at the base of the consolidation range. We can anticipate 2 scenarios, a break of the base of the range can push BKW to re-test the 23.6 Fibonacci level at A$18.33. On the upside, a breakout of the A$ 20.33 resistance can trigger a rally towards A$ 21 and beyond.
Key price levels
The A$ 17.40 multi-year key level acted as a fair price level throughout 2018 to 2020. BKW has moved above this key level in late 2019 before plunging below in April 2020 during the peak of the pandemic. Since end of August 2020, BKW crossed this key level before retesting it in October. The key levels to observe are the upper range at A$ 20.33 which is the near-term resistance, and the lower range at A$ 19.00 acting as the current support.
Volume and momentum
Volume dropped since the last 200-day with the 20-day volume average falling by 60%. The price action proves to be neutral in the near-term, evolving in a range between A$ 19 and A$ 20.33. With the volume declining, prices may fade back to the 23.6 Fibonacci level at A$18.33.
- Market participants might be interested to enter at key support level: A$ 19 and A$ 18.33
- Primary target price above $A 20.14
- Secondary target price at $A 25
- Consider reducing exposure below A$ 18
- It is recommended exiting the trade below A$ 17
We are issuing a buy recommendation for BKW. Brickworks exhibits strong fundamental with high potential for growth supported by continuous long-term rise in profit margin. Brickworks has a solid portfolio of diversified assets that proved to be resilient even during cyclical downturn. We issue a “Buy” recommendation.