A double-digit increase in underlying profit and an upbeat outlook weren't enough to keep profit takers at bay as shares in Brickworks Limited (ASX: BKW) slumped to a three-week low on the back of its results announcement.
The building products and property investment group shed 1.8% to $15.10 in morning trade even as the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) gained 1.0%.
Has the market got it wrong with Brickworks?
Management posted an 18.5% increase in earnings per share (EPS) before significant items to 81.1 cents as revenue increased 8% to $723.6 million for the year ended July 31, 2015.
While EPS was slightly ahead of consensus, the sales figure was a little below although that's not the reason for the sell-off.
Management declared a two cents a share increase to its final dividend of 30 cents, taking its full year fully franked payout to 45 cents. This is around 2.3 cents below what most analysts were expecting.
Is Brickworks another Premier Investments Limited (ASX: PMV)? The retail group fell last week after disappointing investors on the dividends front but I thought the stock was still a buy given its growth potential. The stock subsequently bounced strongly.
While there're a number of things to like about what Brickworks had to say, I don't think Brickworks is in the same category as Premier Investments as I have less confidence in the former being able to sustain double-digit earnings growth for current and next financial years.
Brickworks' building products business is doing great on the back of a record level of residential building activity, which has driven the 25% increase in divisional earnings before interest and tax (EBIT) to $56.4 million.
The key markets of New South Wales and Victoria are booming but the surprise was the strong 30.8% increase in housing commencements in Tasmania.
Total housing starts across the nation rose 15.8% to 209,601 and the strong momentum is expected is expected to persist through the first half of the current financial year, if housing approval data is anything to go by.
The other arm of Brickworks that is doing well is its investment business through Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). Washington H. Soul Pattinson is an investment firm and it contributed $54.6 million to Brickworks' group EBIT in 2014-15 thanks to gains in some of its equity holdings like TPG Telecom Ltd (ASX: TPM).
Brickworks' property investment division also reported an increase in EBIT of 3.1% to $62.4 million that was driven by growth in the property trust.
While I believe building products and property can continue to deliver earnings growth in 2015-16, I am unsure if Brickworks can sustain its strong double-digit profit growth profile.
This is an issue because the stock trades on a fairly lofty 12-month trailing price-earnings multiple of 18.6x. The premium would be more than justified if there was sufficient confidence that Brickworks can keep increasing net profit by 15%-20% for the next year or two.
Brickworks posted a 24% drop in statutory net profit to $78.1 million due to writedowns, litigation costs from a lawsuit brought on by Perpetual Limited (ASX: PPT), redundancies and other one-off expenses.
I am just not sure it can and those wishing to gain exposure to building construction will be better off buying CSR Limited (ASX: CSR) or Boral Limited (ASX: BLD) for their more attractive valuations.
