As one of the major brick manufacturers in Australia, Brickworks’ (ASX: BKW) revenues are significantly determined by the state of the housing market. Given the housing market’s current depressed state the company has done well, reporting solid numbers, with revenues up 15% and normalised net profit after tax up 13% to $56 million. The results were helped along by property sales from the Land and Development division which contributed $37 million to earnings before interest and tax.
Currently Brickworks’ earnings are “shielded” from the depressed housing market thanks to a 40 years cross-shareholding in conglomerate Washington H. Soul Pattinson & Co (ASX: SOL). This arrangement means Brickworks is not a pure-play building products company but rather an investment conglomerate with a controlling interest in brick manufacture and land development and minority interests in a diverse range of businesses including coal mining, retailing and telecom. As management points out the cross-shareholding smooth’s earnings from the cyclical housing business which it is exposed to.
Whilst management considers the cross-shareholding arrangement to be an advantage for the company, some investors disagree, believing it is not in the best interests of shareholders. This has led to a proposal from investor Mark Carnegie supported by fund manager Perpetual (ASX: PPT) for Washington to distribute its shareholdings in investee companies. Meanwhile broker Hunter Green would prefer to see the cross- shareholding unlocked all together. Both parties proposals are attempts to realise value which they believe is currently locked up and not reflected in the share price.
While management is partially distracted with these proposals, they would also along with fellow brick manufacturers CSR Limited (ASX: CSR) and Boral Limited (ASX: BLD) and building supply companies James Hardie (ASX: JHX), Fletcher Building (ASX: FBU) and Adelaide Brighton Cement (ASX: ABC) be focused on the latest housing starts numbers. Pleasingly NSW, WA and New Zealand all showed growth over the previous period, however the rest of the nation contracted; coupled with the reduction in Housing Finance and the tunnel still looks pretty dark.
The best time to buy cyclical companies is at the bottom of the cycle. Astute investors can often be found investing in quality businesses near a cycle’s bottom.
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