Cyclically Challenged Brickworks Prioritises Cash

This story features BRICKWORKS LIMITED. For more info SHARE ANALYSIS: BKW

FY24 results for Brickworks beat consensus forecasts and analysts expect growth for the property division and an increasing dividend.

-FY24 results for Brickworks beat consensus forecasts
-Earnings margins rose, property valuations stabilised
-Several sources of growth for the Property division
-Morgans forecasts a progressive increase in dividends

By Mark Woodruff

Brickworks’ ((BKW)) FY24 results exceeded consensus expectations, driven by stronger-than-anticipated cost control and operational efficiencies within the Building Products divisions in both Australia and North America. Despite a slowdown in construction activity, earnings margins improved.

Industrial property valuations and rental growth stabilised as demand for prime industrial space remains strong, explains Jarden.

As capitalisation rate expansion is largely complete, Ord Minnett suggests the Property segment is well positioned to benefit from both increasing rental income from lease renewals and new developments.

Ord Minnett has raised its 12-month target and upgraded the rating for Brickworks shares to Accumulate from Hold (Accumulate sits in between Buy and Hold on the broker’s five-tiered ladder).

The Property division was adversely impacted by a -$215m devaluation of Property Trust assets in FY24, following an increase in capitalisation rates across the portfolio to 5.2% from 4.1% in FY23, explains the broker.

Promisingly, there was a second half property revaluation of $18m (versus -$233m in the first half) which more than offset a further 17bps expansion in the capitalisation rate at the end of June, points out Bell Potter (remembering Brickworks has a July year-end).

This broker also raised its target price but has downgraded to Hold from Buy on valuation.

Describing the long-term growth outlook as “solid”, Neutral-rated Macquarie still feels further macroeconomic support will be required before developing a more optimistic thesis.

Citi agrees the outlook could improve with lower interest rates driving demand upside, while also noting the stock continues to trade at a discount to realisable value.

Brickworks comprises a diversified group of companies engaged in manufacturing and distribution of clay and concrete products, property development and investments.

Financial results are reported in the following segments: Building Products Australia; Building Products North America; and Property, whereby surplus land is developed. This latter segment includes a 50% interest in two property trust joint ventures with Goodman Group ((GMG)).

The company also has an Investments division, which includes a 26.1% shareholding in WH Soul Pattinson ((SOL)) and a 17.6% stake in WA-based robotics company FBR Ltd ((FBR)), the world’s first fully automated end-to-end robotic bricklayer.

This division primarily derives earnings from WH Soul Pattinson, which in turn derives a large portion of earnings from its equity and private investments. Any reduction in interest rates should benefit these positions, suggests Citi.

Jarden comments this holding in WH Soul Pattinson, along with strength in the JV Industrial Trust with Goodman Group, helped mitigate cyclical residential exposure in FY24. Brickworks generated $157m of earnings in FY24, 14% ahead of the consensus estimate for $138m.

Earnings fell from $784m in FY23 as a result of non-cash property revaluations, explains Morgans. Excluding the impact of the property revaluations and property sales, earnings fell by -4% to $387m.

More positively, earnings margins in Australia and the US rose by 220bps and 230bps, respectively, as management actively cut costs and scaled back production in Australia, while capacity was also well managed in the US, Macquarie comments.

Brickworks has been investing in plant modernisation over the last number of years, with new or refurbished capacity about to come online in both markets.

Anticipating construction activity will remain soft over the next 12-18 months across Australia and North America, management plans to prioritise cash generation to continue delivering shareholder returns through the cycle. Plant closures are planned near-term for maintenance and inventory control.

Morgans sees scope for dividends to progressively increase.

Reliable dividends have been a strong point over time, with a payout every year since Brickworks listed on the ASX in 1962.

Several sources of medium-term growth for the Property division

Management continues to expect trust rental income will nearly double to $341m from $180m at the end of FY24 via a combination of market rent reversions and additional development at Oakdale in NSW and Rochedale in Queensland.

At Rochedale, management is looking to get approvals for a 115,000sqm industrial estate.

Over the next 10 years, Citi sees around 40% upside to in-place rental income for Brickworks, as well as potential upside on new developments as land assets are converted to operating industrial assets in partnership with Goodman Group.

Over and above this, the broker highlights two big land parcels in Craigieburn, Victoria, where 600,000sqm of industrial gross lettable area (GLA) is expected) and a 77-hectare site in Pennsylvania in the US where management has filed applications for 185,000sqm of facilities with entitlement expected in early-2025.

The outlook for revaluations is also positive, according to Citi (noting Brickworks takes property revaluations above the line) with prospects for falling global and local interest rates.

Outlook

For the near-term, earnings forecasts by Jarden reflect ongoing cyclically challenged earnings across both geographies.

On the other hand, Bell Potter sees further value in Brickworks, highlighting building products earnings and Property valuations are now arguably at or approaching a nadir.

Of the six covering brokers covered daily in the FNArena database, four have Hold (or equivalent) ratings, while Ord Minnett and Citi have respective ratings of Accumulate and Buy.

The average target price of $30.46 suggests around 4.7% upside to the share price.

Outside of daily coverage, Jarden is Neutral rated with a $30.00 target.

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