Brickworks: Looking through to the other side
About the author:
- Author name:
- By Kurt Gelsomino
- Job title:
- Date posted:
- 10 August 2021, 8:30 AM
- Sectors Covered:
- Building Materials, Industrials, Gaming
- Brickworks' (ASX:BKW) FY21 guidance for Building Products Australia (BPA) and Building Products Norther America (BPNA) was slightly softer than we expected, while Property guidance was in line with our forecast.
- NSW COVID restrictions are starting to have a significant impact on the BPA business, with the situation remaining highly volatile and difficult to forecast and management needing a full re-opening of construction activity across the state to improve its own forecasting accuracy.
- We have revised our BPA forecasts to take into account the weaker FY21 result and softer 1H22 outlook and included the recent acquisition of Illinois Brick Company (IBC) into our BPNA forecasts. The net impact is a 2.7% reduction in FY21 NPAT and 0.7% and 3.9% increase in FY22 and FY23.
- We continue to see BKW as a core portfolio holding, Hold maintained.
FY21 earnings update
BKW provided an FY21 earnings update, with FY21 guidance for BPA and BPA slightly softer than expected and Property (EBIT of A$250m) in line with expectations. No guidance was provided for its Investment segment. BKW will report its FY21 result on 23 September 2021.
BPA is expected to deliver FY21 EBIT growth of 35%, which implies FY21 EBIT of A$44.0m (2H21 EBIT of A$27.6m, +22%). Guidance was 12% below our previous forecast of A$50.0m, with some of the miss (A$2-3m EBIT) explained by the two week impact of NSW’s restrictions on construction activity at year end.
Following weaker than expected July trading, BPNA FY21 EBIT is now expected to be ‘slightly below’ FY20 in constant currency terms (US$7m pcp) vs. June expectations for constant currency growth. We understand softer July trading reflected the combination of labour challenges as COVID restrictions were eased and some projects temporarily slowing construction in response to input price inflation (particularly timber).
Provides update on impact on NSW COVID restrictions
BKW noted that COVID-19 restrictions are now starting to have a significant impact on the group’s BPA operations, with NSW the company’s largest and most profitable market (43% of 1H21 segment revenue).
The partial recommencement of construction activity in August has supported some improvement, however NSW brick sales remain at 50% of pre-lockdown levels. While its demand outlook remains positive, storage constraints will see BKW temporarily reduce NSW brick production capacity by 30%.
Similar impacts are being experienced across the company’s other building products businesses (e.g. Wetherill Park Precast facility) and it is presenting challenges to BKW’s major capital projects and development activity within the Property Trust.
Positively, BKW noted that demand in Brisbane and Melbourne has been largely unchanged to date and specifically called out strong demand in VIC.
We have revised our forecasts for today’s segment guidance but also included BKW’s recent acquisition of Illinois Brick Company (IBC) in our BPNA forecast.
While we have reduced our BPA EBIT forecasts 12%/10% over FY21/22, our BPNA forecasts have increased 42%/39% over FY21/22 due to the contribution from IBC and favourable FX changes.
Overall, our FY21 NPAT forecast has fallen 2.7% and increased 0.7% and 3.9% in FY22 and FY23.
Investment view: Hold maintained
With leading detached residential construction indicators remaining supportive, we expect the market will continue to look through the short-term disruption NSW’s restrictions are having on the business.
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. However, we maintain a Hold rating, with the stock trading on an FY21F dividend yield of 2.5% (vs. 10-year avg. of 3.5%).
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