This Post Market Wrap is presented by KOSEC – Kodari Securities

• $330m Underlying Net Profit After Tax, up 269 percent on prior corresponding period 
• Property Trust Revaluations $228m, Development Profits $115m 
• Underlying EPS $2.18, interim dividend 22 cents fully franked
• Conservative gearing ratio of 21 percent; interest cover 9.6 times  
• Sale and leaseback of manufacturing sites planned for current half-year
• Trend to lower density living supports brick and roof tile sales
• Exposure to distribution hubs and supply chain logistics supports strong property performance

Brickworks Limited (‘BKW’ or the ‘Group‘) is not just Australia’s largest brick manufacturer; it is also a large scale owner and developer of industrial property. Brickworks comprises four divisions – Building Products Australia, Building Products North America, Industrial Property, and Investments. This diversification underwrites the Group’s consistent earnings growth that has enabled it to pay a dividend every year since listing on the ASX in 1962.

The Group owns Austral Bricks and Bristile Roofing. In North America it owns the largest independently owned and operated brick distributor in the US, as well as the flagship brand Glen-Gery, the leading brick producer in the North-east of the US. BKW is also a successful developer of industrial property assets that service the supply chain needs of the rapidly expanding digital economy. BKW undertakes these development activities using its surplus land assets, in conjunction with the Goodman Group. 

Record Half-year Earnings

Brickworks has reported record earnings for the half-year to 31 January on the back of another stellar result from the Group’s property assets. Underlying Net Profit After Tax (NPAT) of $330 million was achieved, up 269 percent on the previous corresponding period. This amount excludes a one-off profit generated from the deemed deposal of Washington H Soul Pattison shares upon its merger with Milton during the reporting period. Including this amount, the Statutory NPAT was $581 million. The result is equivalent to Underlying Earnings per Share of $2.18, while Statutory EPS was $3.83. In line with the Group’s conservative dividend pay-out ratio policy, an interim fully franked dividend of 22 cents will be paid on May 3. This compares to a 21 cent fully franked dividend paid for the 6 months to January 2021.

The Building Products business segment contributed to the record result, as the backlog of detached housing projects moves through the construction pipeline. Property Trust revaluations contributed $228 million and property development profits of $115 million were recorded during the reporting period. Rental income from property assets contributed $17 million over the 6-month period. This was a 7 percent increase on the previous corresponding half-year.

Building Products Australia performed strongly, with Earrings Before Interest and Tax (EBIT) up 66 percent to $24 million while Building Products North America turned in an underwhelming $1 million EBIT, down 70 percent. The North American business was severely impacted by pandemic related challenges with interruptions to manufacturing operations affected by workforce availability, resulting in higher wages to retain and attract staff. Margins were impacted by supply chain cost pressures, exacerbated by increased transportation costs, brought on by driver shortages and truck availability issues.   

Although net debt increased by $108 million to $626 million, gearing remains conservative at 21 percent of net debt to equity, implying interest cover at 9.6 times. These numbers are well within bank covenant limits, providing the Group with $1.01 billion in committed bank debt facilities. 

Operational Property Trust 

The Group has announced its intention to launch a new Operational Property Trust in partnership with Goodman that will house the Building Products manufacturing sites. The intention is to enter a sale and leaseback arrangement with the Trust, comprising Brickworks’ manufacturing sites.  An initial portfolio of 15 Building Products sites, with an estimated value of $415 million, has been identified for the first stage of the Operational Property Trust.  A definitive agreement with Goodman is expected to be signed during the second half of financial year 2022.   

The sale and leaseback of these manufacturing sites is likely to deliver gross cash proceeds of $200 million, and an estimated pre-tax profit of $260-280 million, following the valuation uplift on transfer of properties across to the Operational Property Trust.

Looking Ahead

Inflationary pressures related to rising fuel costs and labour shortages, together with supply chain bottlenecks resulting in shipping rates increasing back to levels not seen since the worst period of the pandemic, have created some short-term uncertainty for the Group.

On the other hand, the pandemic has boosted consumer demand for lower density living, resulting in a shift toward detached housing building activity. This is a positive trend for 2 key Brickworks’ products in bricks and roof tiles for detached houses. 

Brickworks’ 46-year history of maintaining or increasing shareholder dividends looks set to be maintained over the long-term. This track record is attributable to the Group’s conservative debt level and its exposure to property assets in strategically located distribution hubs that support sophisticated supply-chain solutions, servicing the burgeoning demand created by online shoppers.

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.