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Brickworks

ASX :

BKW

Market Cap : $2.81 Billion

52 Week Range : $17.000 - $26.320

Share Price : $19.08

Dividend Per Share : $0.62

Dividend Yield : 3.28 %

Buy

Brickworks has consistently delivered on dividend growth and has a demonstrated history of increasing shareholder value. We recommend a long-term “Buy”.

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.

We initially recommended Brickworks (ASX: BKW) in December 2021. It is one of the best quality dividend stocks because of the Company’s impressive dividend record. BKW’s dividend has been well maintained and has increased each subsequent year since 1976. In the recently published FY22 half-year result, Brickworks grew its interim dividend by 5% to 22 cents per share.

Decades of consistent dividend growth

One of the main contributors to Brickworks’ growing dividend is its large holding of Washington H. Soul Pattinson and Co. (ASX: SOL, WHSP), an ASX-100 company. The investment conglomerate owns a diversified portfolio containing several different ASX shares, including TPG Telecom (ASX: TPG), New Hope Corporation (ASX: NHC), and Pengana Capital Group (ASX: PCG).

New Hope pays a very handsome dividend, and the company’s dividend distributions have been boosted further by the surging coal prices. As things stand, New Hope has a 10% dividend yield. Going into full year FY22, the company is expected to boost its dividends further as favourable coal prices have increased New Hope’s cashflows.

These dividends will flow through to WHSP and finally to Brickworks. Soul Pattinson also has private business investments contributing to steady revenue streams. It is worth noting that WHSP has grown its dividend consistently every year since 2000, and this year, with New Hope’s cash flow bump, it is expected to increase.

Brickworks has a dividend yield of 3.34% at the time of writing.

Brickworks has declared a fully franked interim dividend of 22 cents per share for the half-year ended 31st of January 2022, up 5% from 21 cents. The record date for the interim dividend will be the 12th of April 2022, with payment on the 3rd of May 2022.

Brickworks is more than a building product company

Brickworks is not just a simple building product company. It is a diversified business with various corporate structures that have proved to deliver earnings stability over the long term. There are four divisions within the Brickworks Group structure:

  1. Building Products Australia
  2. Building Products North America
  3. Property
  4. and Investments.

Brickworks, an innovative group of internationally owned companies

In short, Brickworks specialises in Property, Investments and the manufacture and distribution of building products for the residential and commercial markets.

The Company’s Building Products division is one of Australia’s largest, best known and most diverse building material manufacturers. Brickworks is commercialising a wide range of products such as clay bricks and pavers, concrete masonry blocks, retaining wall systems, engineered and stone pavers, precast concrete panels, and concrete and terracotta roof tiles, to name a few.

In late 2018, Brickworks announced its first US-based acquisition of Glen-Gery, the fourth largest brick manufacturer in the United States. Since then, Brickworks’ North American business has continued to expand through further acquisitions and is now the leading brickmaker in the key Northeastern region, with a reputation for premium products and high exposure to the architectural market.

With a broad product portfolio and manufacturing and sales facilities across Australia and North America, Brickworks is uniquely-positioned to service the demands of the building industry in key regions.

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Source: BKW

Brickworks Property Business

Brickworks established its Property division to maximise the value of surplus land to the Building Products business. Operational land that becomes surplus to the business needs is transferred to the Property division, where it is assessed for optimum land use. In some cases, the land is rezoned to residential and sold. Alternatively, the land is rezoned to industrial, transferred into the Property Trust, and developed, creating a stable, growing income stream. The Joint Venture Industrial Property Trust is a 50/50% partnership between Brickworks and Goodman Industrial Trust. Over the past decade, the BKW Property business has grown significantly and has reached a total asset value of over $1.7 billion. After including debt, Brickworks’ 50% share of the Property Trust has an equity value of $633 million.

In addition to the Property Trust, the Company holds around 3,750 hectares of operational land and 370 hectares of development land. Brickworks also holds 2,400 hectares of land in North America.

Brickworks Investments

The Company’s Investments business consists primarily of a 39.4% interest in Washington H. Soul Pattinson (WHSP), an ASX100 listed Company (ASX: SOL). This shareholding in WHSP is an important source of earnings and cash flow diversification for the Company and has been a key contributor to Brickworks’ success for over four decades. The market value of Brickworks’ shareholding in WHSP is more than $2.1 billion. WHSP has delivered outstanding returns over the long term, with fifteen-year returns of 11.6% per annum (FY19) being 2.6% ahead of the All Ordinaries Accumulation Index. WHSP holds a significant investment portfolio in many listed and unlisted companies, including TPG Telecom, New Hope Corporation, Australian Pharmaceutical Industries, Apex Healthcare Berhad and TPI Enterprises. This provides WHSP with a diversified end market exposure.

Over four decades, WHSP has delivered an uninterrupted dividend stream reflecting the earnings from WHSP’s diversified investments. This dividend balances the cyclical earnings from Brickworks’ Building Products and Property divisions.

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Source: BKW

Company Updates

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Source: Tradingview: BWK 5-year share price performance

FY22 onward Outlook: Brickworks set to rebound after years of challenging conditions

Building Products in Australia have substantially been impacted by extreme wet weather, although the Company reported 6% in revenue growth on PCP

Within Brickworks’ Building Products Australia business, the start of the second half has been significantly impacted by extreme wet weather along the country’s east coast. Persistent heavy rainfall and flooding have severely limited construction activity in key markets such as Sydney and Brisbane. In the case of Sydney, this reduced bricks sales volume by around 50% in the first two weeks of March. Manufacturing operations were also impacted, with major disruptions across almost all plants along the east coast throughout February and March. Despite the difficult start to the first half of FY22, the underlying demand across the country remains strong, supported by a large backlog of detached house construction work still in the pipeline.

With improving weather and pandemic-related restrictions and staff absenteeism easing across most states, the pipeline of work is expected to translate to strong sales for the remainder of the year. In some areas, sales volume may be limited by the availability of trades and the short supply of bricklayers in Western Australia and roof tilers across all regions. In addition, inflationary pressures and supply chain issues are expected to persist for the foreseeable future. The outbreak of war in Ukraine has created additional uncertainty, with potentially wide-ranging impacts across the economy. This includes the price and availability of energy, upward pressure on inflation and interest rates, and a decline in consumer confidence.

Further strain on already stressed international supply chains is evident, with shipping rates increasing back to levels not seen since the worst period of the pandemic. On a positive note, as major ongoing projects are being completed, the Austral Masonry facility at Oakdale East and the Horsley Park brick plant will support the Brickworks’ mid and longer-term earnings.

Revenue for the half-year of FY22 was $348 million, up 6% on PCP. Early in the period, sales in the key Sydney and Melbourne markets were impacted by construction restrictions imposed by state governments in response to the pandemic. Once restrictions were lifted, both markets recovered well, with sales momentum increasing steadily during the half. Accordingly, Brickworks’ EBIT was up 66% on PCP to $27 million, and EBITDA was $54 million. We have also been pleased to see that the Company was able to improve and increase its unit margins, supported by price rises across most business units, offsetting the impact of supply chain difficulties and higher input costs. Furthermore, the increase in plant utilisation resulted in improved production efficiencies, with all manufacturing plants operating close to capacity during the period.

Building Products in North America were also impacted by harsh climate conditions. Nonetheless, Brickworks reported an impressive 84% in revenue growth on PCP

Brickworks’ North American operations have also been impacted by weather in the early part of the second half, with severe winter conditions in the Midwest adversely impacting sales activity in that region. However, positively, the order book is at record levels and is growing strongly. This is expected to flow through to increased sales activity onward the second half of the year across the residential and the higher-margin commercial segments.

Brickworks has undertaken extensive plant rationalisation activities to increase utilisation. The Company also completed upgrades at Hanley and Sergeant Bluff to improve efficiency, which will lead to remarkable manufacturing cost reductions once production volumes normalise.

Acquisitions and integrations

We are confident that the recent integration of IBC, the addition of Capital Brick in February, and GlenGery’s expanded network of 27 company-owned distribution outlets will underpin production across the rationalised manufacturing footprint and provide Brickworks longer-term opportunities for further growth. In addition, Brickworks recently established design studios in New York, Philadelphia and Baltimore, generating a positive response from customers, with several project opportunities emerging, including major international developments.

As in Australia, the short-term market conditions in North America remain exposed to uncertainties vis-à-vis the war in Ukraine and the impacts of the pandemic. However, we assume that it is unlikely there will be major disruptions caused by these events. Although, we expect Brickworks to generate higher earnings from North America in the second half of FY22 on PCP. Over the long term, we expect the North American operations to deliver further earnings growth onward FY23, with Brickworks focused on implementing its proven market strategy to secure its style and premium product positioning.

Brickworks’ Building Products in North America brought revenue of $187 million for the first half of the year, up 84% on PCP. The uplift in earnings was driven by the acquisition of IBC in August 2021 and increased sales to the Texas residential market.

Brickworks’ Property is well-positioned for the emergence of strong demand for industrial land

The strong demand for industrial land reflects structural changes across the economy, as companies modernise their supply chains in response to consumer preferences, such as online shopping. We are confident that Brickworks’ Property Trust is ideally placed to take advantage of these trends, with well-located prime industrial land on large lot sizes. Hence, we expect Current development activity at Oakdale in New South Wales and Rochedale in Queensland to drive rent and asset value growth over the short and medium-term. At Oakdale South, following the completion of Site 1C during the half, a further 40,500m2 of gross lettable area (GLA) remains available for development on this Estate across two facilities, known as Site 2A and Site 2B. Construction has commenced on both facilities, and completion is expected by FY22. Yusen, the global supply chain logistics company, has pre-committed to lease 8,400m2. Construction activity continues at Oakdale West, with all infrastructure in place and the cornerstone Amazon facility handed over. An additional 182,500m2 of the lettable area is pre-committed and under construction, with approximately 45,000m2 to be completed in 2HFY22. The 66,000m2 Coles facility is then due for practical completion in the following half. Enquiry for the remaining 144,400m2 of the lettable area has been strong, underpinned by record-low vacancy rates across the Western Sydney industrial market. At Rochedale, the remaining 30,200m2 space has been fully pre-committed and will reach practical completion within FY22. There is a total of 221,100m2 of pre-committed lettable area across Brickworks’ various Property Trust Estates. We are looking for Brickworks’ completion of these facilities over the next two years, in which we expect gross rent within the Company’s Property Trust to increase by around $35 million and leased assets to reach ~$875 million, assuming a capitalisation rate for new developments of 4%.

In addition to the highlighted pre-committed facilities, another 176,400m2 of lettable space remains available for development within the Trust. Based on current demand, the development of this area is anticipated to be completed within around three years and is expected to add a further $25 million in gross rent and $625 million in gross asset value.

Brickworks also retains 100% ownership of additional parcels of land suitable for sale into the Property Trust, subject to Development Approval (DA). Following the completion of development at Oakdale East stage 1, planning work has commenced facilitating the development of the balance of the Oakdale East site (Oakdale East Stage 2). This area is currently home to the Austral Bricks Plant 3 site. However, this facility will not be required once the new brick plant at Horsley Park is completed. Fairfield Council has lodged an application for developing an industrial estate at this site, with a lettable area of around 250,000m2. If sold into the Property Trust and developed, this site is expected to add at least $35 million in gross rent and $875 million in gross asset value over the next 5 to 6 years. The largest additional parcel of surplus land for development is at Craigieburn in Victoria, directly south of the Wollert factory site. Industrial development may be possible at this site over the medium term. With an expected yield of around 600,000m2 of gross lettable area, if sold into the Trust, this site will extend the development pipeline well beyond the next five years.

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Source: BKW

Acquisition of Capital Brick (North America)

We believe Brickworks is on the right path with its vertical integration strategy. Hence, the Company recently acquired Capital Brick on the 4th of February. Capital Brick is a leading distributor of architectural brick and masonry products, with a single outlet in the Washington DC metropolitan area and a key architectural customer of Glen-Gery. The acquisition expands Glen-Gery’s existing footprint in the states of Maryland and Virginia and increases the Company-owned distribution locations to 27.

WHSP merger with Milton to provide liquidity, diversification, and long-term growth

Washington H Soul Pattinson (WHSP) recently mentioned that it intends to buy Milton Corp to create a nearly $11 billion investment firm to broaden its exposure to other asset classes, including global equities.

WHSP’s offer implies a $6 per share value, which is a 20% premium to Milton’s last close on the 21st of June, valuing Milton at $4.05 billion. Milton’s shares rose more than 16% to a record high that day, while WHSP’s shares appreciated by about 3.6%. From this transaction, we can expect WHSP’s deal to create for Brickworks a larger war chest to tap new asset classes, including expanding private equity and direct credit investments along with exposure to global equities. Milton currently manages around $3.7 billion in assets, mostly Australian equities. The offer has been recommended by Milton’s independent board committee. According to WHSP, shareholders are expected to get three fully franked dividends totalling 52 cents per share as part of the deal. The merger is expected to be finalised by early October.

We are pleased with the recent merger as we believe this transaction will provide WHSP with increased scale, diversification and liquidity for the Company to pursue additional investment opportunities. Thus, we anticipate WHSP to continue delivering superior long-term returns and consistent dividend growth well into the future.

Industry Analysis

Building Products in Australia

Over the past two years, the pandemic shifted consumer demand to lower-density living, resulting in a change in preference toward detached housing over multi-residential alternatives. This is favourable for Austral Bricks and Bristile Roofing due to the relatively high usage of bricks and roof tiles in detached houses. Despite concluding around twelve months ago, the HomeBuilder programme continues to underpin detached housing building activity. However, the full impact of the strong underlying demand was not fully felt during the period. Supply chain delays have been caused due to a range of factors such as the surge in demand from the government incentive programmes, shortages of some building products such as timber, and COVID-19-related issues, including construction restrictions and labour absenteeism. These factors have forced some intermittent shutdowns to Building Products manufacturing plants, extending on-site construction timelines. As a result, a lot of work remains in the pipeline. Over the past six months, multi-residential housing activity has stabilised. Western Australia and Queensland experienced the strongest conditions in the first half. Both of these states were relatively unaffected by the pandemic and have been significant beneficiaries of the HomeBuilder scheme. On the other hand, conditions were more subdued in New South Wales and Victoria. Pleasingly, we have seen the non-residential building rebound in most states, with private investment in offices, accommodation and retail being scaled back at the onset of the pandemic.

Austral Bricks

Austral Bricks’ earnings increased by 38% during the first half of FY22, with sales revenue up 11% to $215 million. Brickworks’ revenue and earnings increased in all east coast states, with brick sales supported by a backlog of detached housing projects steadily moving through the construction pipeline. Performance was particularly strong in Queensland, where a significant uptick in building activity, market share growth and lower manufacturing costs contributed to the improved result. New South Wales also delivered a strong uplift in earnings, despite production being heavily disrupted due to various pandemic-related issues. With demand across the country ramping up in recent months, all east coast manufacturing plants continue to operate at capacity. Supply into Victoria is particularly tight, with other plants across the network, most notably the Golden Grove facility in South Australia, supporting supply into that state. In Western Australia, the sharp recovery in housing activity has resulted in a strong increase in demand. This has required a ramp-up in production amidst tight industry supply. Supply chain pressures are most acute in this state, such as trucking and distribution, following many years of low activity.

Building Products in North America

The COVID-19 pandemic has significantly impacted building activity across the United States, with large implications across building segments and regions. Building activity, particularly in the non-residential segment, was heavily impacted in the early stages of the pandemic, with many major projects delayed or cancelled by state authorities. Since then, there has been a steady improvement in activity in response to government stimulus programmes and the re-opening of the economy.

Across the United States, the total value of building activity was up 10% on PCP during the first half of FY22. This was mostly triggered by a 19% increase in multi-family residential commencements and a 17% increase in non-residential activity.

Brickworks’ recent acquisition of IBC and the Company’s strategy to grow sales into the large and fast-growing southern housing market have increased Glen-Gery’s exposure to the residential segment. This segment now makes up 60% of sales, with non-residential making up the remaining 40%. The IBC acquisition has also increased Glen-Gery’s exposure to the Midwest, making up around 60% of total sales. The Midwest includes major states such as Indiana, Illinois, Iowa, Ohio, Minnesota and Michigan. Compared to other regions across the country, building activity in the Midwest was relatively soft during the period, with single-family starts down 8%, multi-residential starts up 3% and non-residential activity up by 8% on PCP.

Margins were impacted by cost pressures across the supply chain, including a significant increase in transportation costs, amid driver shortages and truck availability issues. Gas costs are also increasing. Although this impact was limited, Brickworks’ plants have long-term supply agreements at fixed prices. More broadly, labour constraints across the industry result in higher wage rates to attract and retain staff. These input cost pressures resulted in an adverse cost impact. Pandemic-related challenges persisted throughout the first half of FY22, with repeated interruptions to manufacturing and distribution operations across the USA as COVID continues to impact workforce availability. Despite these challenges, Brickworks made strong progress on key strategic priorities.

Property

Brickworks reassessed its Property Trust assets, resulting in another strong revaluation profit of $228 million. The revaluation includes a $48 million profit associated with fully-serviced land held within the Property Trust awaiting development. Brickworks’ development activity within the Property Trust has continued to meet the strong customer demand. At Oakdale West, the construction of the state-of-the-art Amazon facility reached practical completion at the end of December 2021. The completion of this facility, together with Building 1C at Oakdale South, resulted in development profits of $115 million during the period.

By the end of the first half, the total value of leased assets held within Brickworks’ Property Trust was about $2.98 billion. The Company generated $113 million in annualised gross rent from its Property Trust with an average lease expiry of seven years and an average capitalisation rate at a steady rate of 3.6%. There are currently no vacancies in Brickworks’ Property portfolio.

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Source: BKW

Investment Thesis

Brickworks posted an impressive 720% net profit growth on PCP for the first half of FY22

Brickworks posted a Statutory Net Profit After Tax of $581 million for the half-year ended 31 January 2022, up 720% on PCP. The underlying NPAT from continuing operations was $330 million, up by an impressive 269% on PCP.

Australia Building Products

Brickworks’ Building Products in Australia remarkably contributed to the Group’s earnings. On sales revenue of $348 million, Building Products Australia Earnings Before Interest and Tax from continuing operations was $27 million, up 66% on PCP. The improved result was primarily due to increased earnings from the Company’s Austral Bricks products, driven by strong underlying demand across all states.

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Source: BKW

North America Building Products

Brickworks’ Building Products in North America recorded an 84% increase in revenue to $187 million, driven by the acquisition of IBC in August 2021. The increased sales in the southern residential market also contributed to the increased earnings. However, EBIT was down 70% to $1 million, with margins adversely impacted by cost pressures across the supply chain. Furthermore, COVID-related challenges impacted staffing levels and production, which weighed on the Company’s revenue. In addition, demand from the higher-margin commercial and architectural segment remains weak compared to pre-pandemic levels.

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Source: BKW

Property

Brickworks’ Property business substantially contributed to the Company’s earnings during the period. Hence, Property EBIT was a half-year record, up 289% to $358 million, driven by another strong performance from its 50/50 joint venture property trust with Goodman Group. Brickworks’ strong revaluation and development profits were reported during the year’s first half. This resulted in Brickworks’ share of the net asset value within the Property Trust increasing by $349 million to $1.26 billion. The increasing value of the Property Trust visibly reflects a significant structural change across the economy, as businesses modernise their supply chains in response to consumer preferences shift toward online shopping.

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Source: BKW

Brickworks’ investments

Brickworks’ Investments business division strongly contributed to the Group’s earnings during the year’s first half. Thus, Investments division earnings (EBIT) were $73 million, up by an impressive 196%, with WHSP’s earnings benefitting from an increase in the contribution from New Hope Corporation and Round Oak Minerals. During the half, WHSP completed a merger with ASX-listed investment company Milton Corporation (ASX: MLT). The market value of Brickworks’ shareholding in WHSP at $2.576 billion at the end of the first half of FY22.

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Source: BKW

Solid contribution from all Brickworks’ business segments brought an NPAT of $251 million for the period

Significant items increased NPAT by $251 million for the first half of FY22, contributed by:

  • A net profit of $279 million following WHSP’s merger with Milton.
  • A $2 million profit from WHSP’s significant holdings.
  • Brickwork’s restructuring costs of $6 million net of tax, mainly related to the relocation of the Austral Masonry plant in Sydney.

Overall, Brickworks continues to exhibit strong fundamentals, with its Statutory Earnings Per Share (EPS) surging to $3.83, up 710% on PCP, while the Company’s Underlying EPS from continuing operations reached $2.18, a 266% increase on PCP.

Stable EBITDA Margin and ample liquidity to support Brickworks’ future investments and dividend growth

Brickworks’ total cash flow from its operating activities was $63 million, slightly down from the previous corresponding period, $76 million in the first half of FY21. The minor decline in cash flow from operating activities was mainly due to cash generation impacted by increased inventory within Building Products operations.

Brickworks reported a capital expenditure of $43 million during the period, with the Company midway through a significant investment programme across a range of major projects. Project spending involved a new brick plant at Horsley Park in NSW, a new masonry plant at Oakdale East (NSW) and the deployment of a new enterprise resource planning system. Furthermore, during the period, Brickworks significantly ramped up its investment activities with spending on acquisitions of $64 million, representing mainly the IBC purchase, completed in August 2021.

During the half total, shareholders’ equity was up $509 million to $2.989 billion, primarily reflecting the increased statutory profit, offset by dividends paid to shareholders. Brickworks’ reported net tangible assets per share of $16.72, up from $13.88 in FY21, due to the increase in total shareholders’ equity. Total interest-bearing debt was $705 million at the end of the period. After including cash on hand, net debt was $626 million, an increase of $108 million during the half. Brickworks exhibits a robust capital structure mix, with gearing remaining at 21%. Brickworks has about one-billion-dollar in committed debt facilities, with significant headroom across all banking covenants.

Despite facing challenging trading conditions during the year’s first half, Brickworks maintains an adequate working capital of $336 million, including a finished goods inventory of $342 million.

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Considering the business’ growth potential from its intention to ramp up acquisitions and its ability to maintain a consistent cash flow from operating activities, we conservatively forecast Brickworks’ earnings to remain steady above $921 million with an EBITDA margin above 3.68%, capped at 4.98% from FY23 to FY26.

Recommendation

Brickworks has never failed to deliver dividend growth since 1976. During the first half of FY22, Brickworks grew its interim dividend by 5% to $0.22 per share as the Company continues to exhibit solid fundamentals, benefitting from the booming property market. Brickworks continues its growth trajectory as the Company is ramping up its investment activities while finalising its WHSP and Milton merger. The building products market is also set for a strong rebound in Australia and North America. We recommend long-term investors to ‘Buy’.

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