Brickworks Underpinned By Dwelling Activity

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

-Back seat for investments, property
-Decision on CSR/BLD JV key catalyst
-Difficult comparables being cycled
 

By Eva Brocklehurst

One of the best residential construction scenarios in many years underpins the Brickworks ((BKW)) building products business. This segment of the company is benefiting from the upturn in dwelling activity, with improved volume and profitability in bricks, roof tiles, masonry and pre-cast concrete. Investment and property earnings, while remaining relatively stable over the longer term, are likely to take a back seat in FY15. 

The company's FY14 investment performance was weaker than Deutsche Bank expected, made up for by stronger-than-expected land sales. Management expects activity in Australia's housing market will be the strongest for a decade during the first half of FY15, with robust orders in the pipeline. Brickworks' final distribution of 28c was in line with expectations but it was the first time the final payment has increased since FY10. Management provided no quantitative guidance for FY15 but does expect property earnings to be lower, with a reduced contribution from land sales.

Brick pricing is strong in some markets while competitive in others. Moreover, Deutsche Bank expects pricing outcomes may improve if the joint venture between Boral ((BLD)) and CSR ((CSR)) in bricks is approved. A decision on this JV is considered likely by the end of the year and may usher in more disciplined pricing in the industry. The broker reiterates a Buy rating on the stock, given the leverage to the residential sector and the evidence of strong pricing momentum, with a target of $15.19. The business has developed a pre-cast concrete and masonry division over the last 3-5 years, increasing exposure to the higher density dwelling sector. While pre-cast is currently running to expectations and masonry has been restructured this is where, if Brickworks does not achieve continued category and price growth, it may negatively impact on Deutsche Bank's forecasts.

Citi observes progress in improving margins but also a lack of leverage in building products, largely because of patchy pricing outcomes and higher input costs. The challenge is evident in Western Australia, in particular, where competition is placing market share ahead of profits. The broker is also awaiting the decision on the CSR/BLD JV, believing that Brickworks' decision to add capacity in the east coast will boil down to a choice between market share or pricing-based returns. Better to just let demand build at this stage, in Citi's opinion. The broker believes the stock does not offer much upside and retains a Neutral rating and $14.50 target.

Bell Potter believes the first half is likely to offer the best operating conditions in over a decade for residential building products but this is now reflected in the earnings base and, as lead indicators for dwellings appear to be peaking, Brickworks will start to cycle difficult comparables. The broker has reduced profit forecasts for both FY15 and FY16 to reflect a lower Australian dollar coal price forecast for New Hope Coal (((NHC)) – hence Brickworks' investment earnings – and a modest reduction in the contribution from building products.

Having outperformed the sector recently, Brickworks' discount applied to the building products business has closed to 5% from 15%. Bell Potter downgrades the rating to Hold from Buy with a target of $14.55, reflecting lower earnings, unfavourable marking-to-market of investments and a higher net debt balance by year end. 
 

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