Brickworks On Firm Course In FY16

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

–Sustaining price rises
-Skill shortage constraints?
-Potential to re-start capacity

By Eva Brocklehurst

Brickworks ((BKW)) is in a purple patch. Not because of its investments, which largely disappointed brokers in the FY15 results, but because of its strong leverage to the buoyant building product market as well as its substantial land bank.

The company believes, with residential building at its highest level on record, strong momentum in building approvals will drive sales over coming years. This is underpinned by historically low interest rates. Moreover, the company was able to push through price increases of 5-10% from July 1, 2015, for its Austral Bricks division, and other divisions should also sustain price rises over the coming year.

The valuation of the stock reflects these supportive conditions, in Macquarie’s opinion. Hence, a downgrade to Neutral from Outperform. The prospect of land sales and development profit has led to an upgrade to forecasts but the broker maintains a degree of conservatism relative to guidance because of some substantial property transactions slated for late FY16.

Revenue from bricks grew 11% in the second half after growth of 17% in the first half. Bristile Roofing sales momentum improved in the second half although wet weather on the east coast slowed progress. Macquarie observes land and development earnings were a little light versus its expectations, while investments were broadly in line. The improvement in operating cash flow appears attractive at first glance but the broker does highlight the fact this included property disposals.

Labour constraints accompanied by escalating trade costs could be a constraint on housing activity in FY16, Citi suspects. While demand for bricks is robust there is growing concern in the construction industry regarding suitably skilled bricklayers and, while a supply response will eventually ensue, there is likely to be a near-term constraint on activity. Amid an elongated construction cycle, the broker expects 14% earnings growth in building products for Brickworks.

Land and development are significant focal points and, despite management’s guidance for property earnings to be flat in FY16, Citi flags the opportunity that exists in the company’s land position, which could provide upside surprise for earnings.

The result was weaker that Deutsche Bank expected, largely because of a soft performance for the investments division. Specifically, the company’s investment in New Hope Corp ((NHC)) delivered a lower return as a result of the resources downturn. The diversified holding in WH Soul Pattinson ((SOL)) investments should deliver increased earnings and dividends in the long term, the broker believes. Deutsche Bank expects 21% earnings growth for building products in FY16 and an increase in margin to 9.6% from 8.0%.

The order book is extremely strong, particular for Austral Bricks and Bristile Roofing along the east coast. In response to the increased demand the Punchbowl factory has changed to a premium brick manufacturer from floor tile and pavers. The Horsley Park plant 2 was brought out of moth balls in March and is running at 50% capacity. Deutsche Bank notes there is surplus capacity and a mothballed kiln in South Australia but these would take six months to come on line. Throughput could increase 10-15%, the company suggests, should conditions warrant.

Earnings were modestly ahead of Bell Potter’s forecasts, because of a higher-than-expected contribution from SOL. The near-term outlook is encouraging for building products and there is potential in the sale of the Oakdale West property as well as a boost from a $60m distribution from the BGAI CDC Trust.

Bell Potter makes only small upgrades to FY16 and FY17 forecasts, 1.9% and 1.0% respectively. The broker, not one of the eight monitored daily on the FNArena database, considers the current share price implies a value for the building materials assets at a premium to the sector. Hence, a Hold rating and $15.06 target.

The holding structure may be complicated but Morgans likes the cross holding options with SOL, which provide some counter-balance to building products as earnings are supported by property development and investments. That said, this broker, too, believes the stock is trading near full value and downgrades to Hold from Add. Any share price weakness would be used as a basis to accumulate the stock again.

FNArena’s database has one Buy and three Hold ratings for Brickworks. The consensus target is $15.69, suggesting 3.8% upside to the last share price. This compares with $15.61 ahead of the results. Targets range from $14.90 (Citi) to $16.54 (Deutsche Bank).
 

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