Brickworks Enjoys Benefits Of Housing Recovery

This story features BRICKWORKS LIMITED, and other companies. For more info SHARE ANALYSIS: BKW

-Increases interim dividend
-Improves multi-dwelling exposure
-Coal earnings decline
 

By Eva Brocklehurst

Brickworks ((BKW))  has maintained that FY14 earnings should comfortably exceed FY13. The proportion of the segments contributing earnings to the building material and investment conglomerate are seen changing, nonetheless. Brokers expect that building products will increase, thanks to a housing recovery, while the contribution from investments, notably in thermal coal, will decline. The property trust joint venture is expected to become increasingly important.

What makes Citi most confident is the increase in dividend. The company has not increased the dividend for two years and has raised the interim to 14c from 13.5c, signalling to the broker a meaningful improvement is likely in earnings.

The company's building products business is gaining momentum with the ramp-up in house building as well as an improved market structure in masonry, which should deliver a better performance in multi-residential business. Brickworks has shifted its pre-cast concrete focus to multi-unit dwellings from industrial sheds and warehouses, a move that Macquarie thinks bodes well for the future. Macquarie considers the business has been thwarted in achieving good returns because of a competitive market structure. Brickworks observed that the early stages of the housing recovery were slow to translate into increased demand for building materials, with the notable exception of bricks in Western Australia, but the company is now witnessing a more broad-based recovery in demand.

Brickworks did express dissatisfaction with the returns and margins in building products in the first half. To the company's credit Macquarie considers the margin decline appears to have stabilised somewhat and returns should improve as detached housing activity increases. Deutsche Bank was encouraged by a more positive outlook from management. Bricks have maintained their market position in terms of wall finish and the broker thinks the robust reduction in inventory, positive pricing momentum and improved conditions means a second half earnings margin of 8% should not be difficult to achieve.

Deutsche Bank also thinks the increased multi-residential exposure is positive and reiterates a Buy rating. Citi notes the building products market is behaving rationally for now an the company has committed to profitability rather than market share, implementing price increases. While the price increases are yet to be realised, indications are that it's tougher in the west of the country and more accommodating on the east coast.

Brickworks is now looking at how best to offset the potential for significant increases in energy costs in its building products business. Current contracts expire in December 2014 and the offers of gas that are forthcoming are at higher prices. The company is planning to implement a range of alternative fuels projects, including landfill gas and sawdust. Land and development produced the most significant contribution to earnings in the first half and this will rise in importance, according to Macquarie. Net trust income from property increased 20% to $6.1m. Brickworks is undertaking a number of developments within the trust to contribute to both revaluation profits and increased rental returns. Citi considers the land and development business is fairly valued at present, in the context of earnings volatility and the illiquid nature of land investment.

The third spoke in the company's earnings wheel is investments in other companies. Brickworks' investment earnings declined 17.8% in the first half, largely affected by lower returns from New Hope ((NHC)) because of depressed thermal coal pricing. Macquarie suspects that thermal coal prices will remain under pressure, with any upside capped by the ability of supply to re-enter the market. Brickworks holds 43% of WH Soul Pattinson ((SOL)). Citi thinks Soul's history of long-term outperformance is likely to help boost returns relative to peers.

On the FNArena database there are two Buy ratings and one Hold. The consensus target price is $15.25, suggesting 7.7% upside to the last share price. This compares with $14.87 ahead of the interim results. Targets range from $15.00 to $15.66. 
 

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