Australia | Nov 25 2020
This story features BRICKWORKS LIMITED, and other companies. For more info SHARE ANALYSIS: BKW
A strong year beckons for Brickworks in Australia where building activity is ramping up. In contrast, the US business is subdued, beset by the pandemic
-Australian building products to cycle weak prior first half
-US operations negatively affected by the pandemic
-Oakdale investment key to development profits
By Eva Brocklehurst
The Australian bricks and masonry business of developer Brickworks ((BKW)) has made a strong start to FY21 and government stimulus for the building industry post the pandemic is expected to stand it in good stead.
The company has indicated first quarter earnings are well ahead of the prior corresponding quarter and sales revenue is “steady”. Activity is being supported by government stimulus across the Australian states.
A solid bank of customers in the local home builder market has been flagged for the remainder of FY21 and first half earnings will also cycle weakness in the prior corresponding first half when revenue declined -9.9% and earnings were down -62%.
This was caused by a sharp slowdown in building activity, increased gas costs and numerous plant shutdowns. Since then a recovery has been underway and stimulus benefits are still to fully flow to Brickworks.
The exception in the outlook is Western Australia, where excess demand and weak prices are dampening conditions. The company expects uncertainty to prevail until the ACCC (Australian Competition and Consumer Commission) rules on the proposed acquisition of Midland Brick.
Morgans increases estimates for the Building Products Australia division over FY21-22, noting that customers experiencing strong orders are now becoming concerned about the ability of masonry producers to keep up with demand.
Building Products North America
In the US, where the company has established itself as a leading brick maker in the north-eastern region, operations have been negatively affected by absenteeism related to the pandemic, and in response Brickworks is lowering output.
UBS observes this is a consistent theme across the US in the building sector and the risk of industry supply disruption remains elevated. State authorities are deferring projects because of financing concerns amid the US election and uncertainty related to the pandemic. Macquarie forecasts a -10% decline in sales in the first half for BPNA.
Morgans highlights that North American sales are around 65% weighted to higher-margin architectural products and the surge in coronavirus cases is disrupting sales and manufacturing operations. Nevertheless, all Brickworks' plants are operational.
On the demand side, most of the company's business is non-residential and this segment of the market is down -20% as local governments struggle with funding. The company is also cautious about residential activity as increased absenteeism could be a risk to home building activity.
Longer term, the end markets in the US in Australia are expected to benefit from reduced urbanisation and record low interest rates.
In the property business the company's holdings feature some of Western Sydney's most sought-after industrial land. The main asset is Oakdale, which has large acreage and leasable space as well as access to important transport networks.
This land was bought in 2017 by the Goodman Industrial Trust in which Brickworks holds a 50% stake and value has since more than doubled. UBS finds the stock compelling because of this interest.
Over time the broker expects the share price to reflect a lower property capitalisation rate (ratio between net income and cost of the asset) of less than 5%, as awareness of the development increases. Morgans also envisages upside potential from capitalisation rate compression in the first half result.
Meanwhile, construction of the Amazon facility at Oakdale West is advancing and completion expected in September 2021. Upon completion of both the Amazon and Coles ((COL)) facilities, net rental distributions to Brickworks are expected to rise by over 25% and gross assets grow to over $3bn.
The combined sites cover less than 40% of Oakdale West so Macquarie anticipates further earnings potential for developing the remaining 60%.
The first facility at Oakdale East includes the Austral Masonry plant and a display and office space leased to Brickworks that will be completed in the second half. Development profits will be realised in the trust and the company has indicated discussions are underway in relation to new leasing opportunities within the trust.
There are four from four Buy ratings on FNArena's database. The consensus target is $21.09, signalling 4.1% upside to the last share price.
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