Brickworks Builds On Property Benefits

Small Caps | Sep 27 2022

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

Brickworks, Australia’s biggest brickmaker, should be able to leverage its property segment for longer-term growth, but analysts have pointed to risk in short-term earnings amid a rising rate environment.

-Brickworks delivered sizeable beat to consensus expectations, underpinned by strong property segment earnings
-Property expected to continue to deliver in the coming year
-Building products may be weighed down by rising rates
-Analysts have raised concerns as to Brickworks’ ability to repeat the result given the macro environment

By Danielle Austin

Having reported strong year-on-year growth with its full year result the market is focused on how macro conditions will impact on Brickworks’ ((BKW)) ability to deliver again in FY23.

The company delivered a strong beat to consensus forecasts, supported by underlying earnings growth across all divisions. Underlying earnings of $1,058, were up 133% year-on-year and net profits of $746m were up 159%. The result was led by a 155% year-on-year earnings increase within the property segment, contributing $644m to company earnings.

While property earnings included $387 in development profits and $227m in revaluations, the company also benefitted from a $631m increase in its Goodman Industrial Trust joint venture asset ((GMG)). The trust allows Brickworks to transfer land surplus to the needs of the building products segment to its property division for use to be optimised. This includes land being rezoned and sold, or redeveloped by the trust to generate an ongoing revenue stream.

While both building products segments benefited from improved underlying demand in the last year, analysts remain unconvinced of ongoing strength in the segment, with some pointing to a rising rate environment in both regions as likely to weigh on growth over the next year.

The Australian division in particular delivered a 220% earnings increase in FY22, and while there is visibility over a building products pipeline in the first half, analysts have pointed out less clarity in the second half.

Amid rising rates in the year past, Brickworks also issued price increases of 8-10% to mitigate supply chain pressures. These increases supported earnings margin growth in the last year, but could prove vital to earnings when gas contracts are renegotiated in FY24.

Brokers uncertain as to ability to deliver growth on a weaker building products outlook

Largely surpassing the markets expectations with its full year result, three of FNArena’s database brokers are equivalent Buy rated on Brickworks with only Macquarie Neutral rated. These brokers have an average target price of $26.18, with a range of $22.80-29.90.

Short-term, Ord Minnett (Buy, target price $29.90) expects a strong pipeline of work from domestic housing activity and an improving outlook for non-residential construction in the US to support earnings growth. The broker sees Brickworks’ property division as offering upside for the business.

Citi (Buy, target price $28.00) also sees upside to earnings in the company’s property operations, anticipating industrial assets may surprise to the upside given strong rental growth. Citi expects there is longer-term value in the stock, with significant upside potential to Brickworks’ property income if it can leverage access to land at historical lows while industrial vacancy remains near record lows.

Given the pipeline of projects that could prove value accretive in coming years, and with the stock trading at a -35% discount to the company’s net tangible assets, Morgans (Add, target price $24.00) finds the current valuation cheap.

While acknowledging Brickworks does operate in a fairly defensive segment, Macquarie (Neutral, target price $22.80) fails to see compelling value in the stock given the current macro environment.

This broker anticipates building products will be a headwind for the coming year, highlighting concern around lack of visibility over Brickworks’ building products pipeline come the second half. Following the full year result, Macquarie cut its earnings per share forecasts -8.1%, -9.3% and -6.1% through to FY25.

FNArena's consensus price target of $26.17 suggests potential upside of no less than 24% from today's share price.

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