Brickworks Underestimated & Cheap, Brokers Say

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

Brokers generally approve of Brickworks’ FY23 results and envisage a positive outlook despite industry headwinds. 

-Brokers remain upbeat on Brickworks after FY23 results
-Backlog of housing work offsetting low housing starts
-Share price discount exceeds historical average
-Landbank exposure is unique, according to Citi

By Mark Woodruff

The release of FY23 financials in late September by Brickworks ((BKW)) triggered a negative response, and amid generally steep volatility in share markets globally, the share price has yet to recover. But analysts remain generally upbeat on the company's outlook.

In reference to the share price weakness, Morgans suggests investors may have been panicked by a headline decline in earnings or management's soft commentary around building products.

In actual fact, earnings were negatively impacted by a one-off property sale in the prior year, explains the broker, while management had been flagging forthcoming weakness in building products since the first half of FY22.

Jarden points out higher borrowing costs (higher interest, more leases) did weigh on the result, mitigated by a lower depreciation and amortisation expense.

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 experienced a sharp increase in value over FY23, points out Citi. 

Investments include a 26.1% shareholding in Washington H 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.

Jarden suggests Brickworks’ convoluted corporate structure ensures a material share price discount to the company’s inferred value, but the current discount of -36% is considered a step too far, relative to the -19% long-term average.

Despite current macroeconomic uncertainty, Add-rated Morgans sees cause for optimism as industrial real estate markets are coming off an exceptionally strong year, and the backlog of housing work is largely bridging the gap from low housing commencements.

Ord Minnett is less convinced and has downgraded its rating to Hold from Buy. It’s thought Property earnings will come under pressure as capitalisation rates expand, while weak housing markets in Australia and the US will likely weigh on earnings from Building Products.

FY23 adjusted earnings (EBITDA) of $784m came in -15% below the broker’s forecast and – 9% adrift of the consensus expectation.

Underlying profit of $508.3m was a 9% beat against Bell Potter’s forecast. At a headline level, the profit fell by -32% year-on-year due to the sale of large Oakdale East Stage 2 into the Industrial joint venture with Goodman Group.

Bell Potter points to a major contribution by Property ($236.7m) with net rent, revaluations and development profit all exceeding this broker’s expectations despite rising funding costs and capitalisation rates.

There were, however, misses of -5% and -7%, for Building Products Australia and Building Products North America, respectively, against Bell Potter’s forecast. This was due to worsening unit labour and electricity costs (by around -13% and -28%, respectively), which outstripped the benefit of pricing measures earlier than the analyst had anticipated.

Management has decided to exit its building products operations in WA given sustained historical operating losses and loss of customer accounts while attempting to increase prices, explains Citi. This resulted in a -$55m post-tax charge for impairment and exit costs.

Brickworks is a model of consistency when it comes to paying dividends, given it has been 47 years since the full year dividend last decreased.

This time around the board declared a 42 cent fully franked final dividend, lifting the full year dividend to 65 cents.

Jarden suggests this relatively low payout combined with a strong balance sheet supports a continued progressive dividend policy, with potential upside risk.

The prospects for special dividends or buybacks is low, according to the broker, given the management team has a longer time horizon than most.

Property Trusts

Management outlined the pathway to $350m per annum Trust net rent ($275m prior) given continued escalation in Western Sydney industrial rents.

The Brickworks share price is currently trading at levels consistent with an around -23% depression correction of its property trust value, which Bell Potter considers excessive.

This broker points to above peer average under-renting and a substantial IN1 zoned (general industrial) land bank in a supply-constrained Western Sydney market.

Outlook

According to Bell Potter (Buy), there is a positive outlook for the industrial real estate segment, which should help offset clearly weakening conditions for the bricks businesses.

While earnings from Building Products will likely face headwinds from the second half of FY24, Buy-rated UBS expects Property to fare better through the downturn, with strong rental increases providing an offset against capitalisation rate headwinds.

Citi believes an investment in Brickworks provides a unique exposure of landbank in a market where industrial assets are still in strong demand, while serviced industrial land continues to be in short supply.

Adding further to the company’s allure, the broker notes the Investments division has a strong track record of performance with Washington H Soul Pattinson generating strong returns.

FNArena's daily monitoring of Brickworks consists of six brokers with four Buy (or equivalent) ratings and two Hold recommendations. The average target price is $27.20, which suggests nearly 10% upside to the latest share price.

Neutral-rated Jarden is not monitored daily. This broker has, post FY23 release, maintained its $28.75 target.

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