Brickworks: Property continuing to drive a favourable outlook

About the author:

Kurt Gelsomino
Author name:
By Kurt Gelsomino
Job title:
Analyst
Date posted:
24 September 2021, 9:00 AM
Sectors Covered:
Building Materials, Industrials, Gaming

  • Brickworks (ASX:BKW) reported a strong FY21 result, which was in line with our expectations and underpinned by a record result from its Property segment (63% of group EBIT).
  • A very strong development pipeline supports another positive year ahead for Property and pre-committed GLA is expected to drive a 60% increase in gross rent over the next two years.
  • The combined Building Products businesses should see an ongoing cyclical recovery in earnings, which will likely be more weighted to the 2H22 as COVID challenges moderate and market activity picks up.
  • We continue to see BKW as a core portfolio holding, with strong asset backing. Hold rating maintained.

Record Property result underpinning a strong FY21 performance

Brickworks (ASX:BKW) reported FY21 revenue -6% yoy, underlying EBIT of A$383 (+86% yoy) and underlying NPAT of A$285m (+95% yoy). Adjusting for the stronger than expected SOL contribution, the remaining divisional results were in line with recent guidance and our forecasts. The final dividend of 40cps ff was in line with our forecast.

The performance of the Property segment was the highlight, with record EBIT of A$253m (+95% yoy; 63% of group) underpinned by A$149m in Property Trust revaluations (avg. cap rate down 80bps to 4.2%), land sales (A$52m), net trust income of A$31m (+3% yoy) and development profits (A$24m).

BPA EBIT rose 36% to A$44.4m on steady revenue, BPNA EBIT was -15% to A$8.5m and a materially improved share of SOL profits (non-cash) was received at A$96.9m (+91%; A$58m in dividends received).

Strong Property pipeline; Building Products to see a continued recovery

Property: The outlook for the Property segment remains very positive, with development activity within the Trust to progress at a rapid rate in FY22. A number of developments are expected to be completed during the period, including the Amazon and Coles facilities at Oakdale West. Over the past ~6 months, the Trust’s pre-committed GLA has increased to 284,100m2 (from 171,300m2 before), which is now expected to increase gross rent by ~60% (or A$51m) over the next two years (vs. +40% or A$38m previously). We note the incremental 112,800m2 of GLA secured implied rent of ~A$115/m2 compared to the ~A$220/m2 implied on the prior pre-commitments (which included the more advanced Amazon/Coles facilities).

BPA: We expect BPA to deliver an ongoing cyclical recovery and forecast FY22 EBIT of A$52.5m, up 18.2% yoy. While underlying demand across Australia is strong and there is a large backlog of residential construction work in the pipeline, recent lockdown restrictions across NSW and VIC (73% segment revenue) have created a more challenging start to FY22. NSW sales are now approaching prior levels and a stronger 2H22 is expected as COVID restrictions ease.

BPNA: Earnings growth is expected (MorgansF FY22 EBIT A$20.4m, +140%) supported by improving sales volumes, the benefit of plant rationalisation and upgrade initiatives, recent sales and marketing investment and the contribution from its recent acquisition of IBC. However, sales into its higher-margin non-residential segment are expected to remain subdued in the near-term, which are currently tracking at c30-35% of sales (vs. 60-65% before). Detached residential demand is expected to remain strong but is a lower-margin segment for business.

Forecast changes

Headline forecast upgrades are material at the group level (EBIT +48%/31%/47%) over FY22-24, however primarily reflect increased estimates of greater non-cash contributions from the Property and Investment segments.

Due to recent VIC restrictions, we have moderated BPA FY22 EBIT -3.6% (FY23/24 unchanged) and also revised BPNA expectations over the forecast period.

Investment view: maintain Hold rating

We continue to see BKW as a core portfolio holding, supported by an asset heavy balance sheet, industrial property tailwinds and cyclical upside from a recovery in Building Products.

With the stock trading within range of our new SOTP-based (login to view) price target and on an FY22F dividend yield of ~2.5% (vs. long-term avg. of 3.5%), we maintain a Hold rating. Continued strength in the SOL share price will likely see the stock’s valuation remain well supported.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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