Brickworks BKW is a conglomerate consisting of building product manufacturing operations, property management, and a cross-shareholding in ASX-listed investment firm, Washington H. Soul Pattinson & Company, or Soul Patts.
Most of Brickworks’ value is derived from its investments, with less than 10% of enterprise value from its Australian and North American building products businesses.
At March 20 prices, shares in Brickworks are undervalued.
Why it matters: Interest-rate-sensitive stocks, like real estate trusts, have come under pressure as the market reassesses credit metrics across the sector. But Brickworks’ industrial properties are well located, tenants are high quality, vacancies are low, and gearing of 26% is conservative—well below the debt covenant of 60%.
Underlying net profit after tax of AUD 76 million was up 308% from the prior year when it reported a loss. Higher earnings were from the property segment without the significant property devaluations in the PCP. The Australia and US building product businesses reported a decline in operating income, reflecting a cyclical downturn in the construction sector while interest rates remain high. Boosting cash flow, dividends from its investment in Soul Patts were 8% higher than the PCP.
The bottom line: We maintain our fair value estimate of $32 for no-moat Brickworks following first-half fiscal 2025 results. Our revenue forecasts for the underperforming North America building products business are essentially intact, but the hit to earnings from plant closures during the half was more significant than we expected.
Business strategy and Outlook
Brickworks is a conglomerate consisting of building product manufacturing operations, property management, and a cross-shareholding in ASX-listed investment firm, Washington H. Soul Pattinson & Company, or Soul Patts.
Most of Brickworks’ value is derived from its investments, with less than 10% of enterprise value from its Australian and North American building products businesses. We estimate about half of Brickworks’ enterprise value derives from its holding in Soul Patts, a reputable investment house with a multi-decade history of outperformance versus the All Ordinaries Accumulation index. Brickworks’ industrial and manufacturing property business, which monetizes unused or surplus land from Brickworks’ manufacturing sites, contributes the remainder of Brickworks’ enterprise value.
Brickworks’ operational strategy for its building products segment is to reinforce its position as the lowest-cost brick manufacturer in its two segments of Australia and North America. Brickworks entered the United States, or US, in 2018 via the acquisition of Glen-Gery, a building product company similar to Brickworks. In both geographies, Brickworks follows a strategy of plant rationalization, and plant upgrades to improve efficiency, capacity, and sustainability. Product innovation such as a high-end range in bricks, cladding and pavers aids higher gross margins. As a cyclical business, we view Brickworks’ strategy to continuously improve unit costs positively.
Brickworks Bulls say:
- State and federal government policy to increase supply of Australian housing over the coming years supports near-term demand for brick volumes.
- An extensive land bank in Western Sydney provides ample opportunity for warehouse and industrial development in this high-demand area, with JV partner Goodman Group.
- Contributions from cross-shareholding with Soul Patts provide protection from the cyclical brickmaking businesses.
Brickworks Bears say:
- Brick use is expected to decline due to a greater range of alternative building materials, smaller house sizes, and a change in design preferences and building types.
- Brickmaking is a capital-intensive business, with high capital costs to run two geographically independent brick businesses.
- Brickworks can be a complex business for investors to follow due to the cross-shareholding with Soul Patts, an investment company which derives its earnings from many diversified investments.