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How you can buy this top quality company for a 30% discount

It’s one thing to find a quality business to invest in. Buying shares in that business for less than they’re worth is another thing.

There’s one company that often goes under the radar of most investors, yet is a quality operation and trading at a large discount to its net asset value. That company is Brickworks Limited (ASX: BKW).

Operations

Brickworks is a building products company which was established by a few leading brickmakers in Sydney during the 1930s. This side of the business now consists of a number of companies including Austral Bricks and Bristile Roofing, amongst others. It’s now the largest brickmaker in the country.

The company also has a property division. This includes 50% share in a $1.5 billion industrial property trust, and land holdings, which are either developed to be sold or leased.

Brickworks also owns a very large stake (42.7%) of Washington H. Soul Pattinson & Co. Ltd  (ASX: SOL), which it acquired in 1969. This has grown in value substantially over the years, along with the value of Soul Patts.

With this large investment, the company has substantial exposure outside building products, including telecom provider TPG Telecom Ltd (ASX: TPM), coal miner New Hope Corporation Limited (ASX: NHC), and some healthcare and financial services companies.

This gives Brickworks an extra stream of earnings through Soul Patt’s growing fully franked dividend.

Value

Brickworks today represents outstanding value. Here’s why…

At current prices, the value of its holding in Soul Patts is $2.5 billion. According to its recent report, its net property assets are worth $574 million. The net tangible assets of the building products business are $733 million. It also has debt of $304 million.

Add that up and the net assets and investments are worth around $3.5 billion. The current market cap of Brickworks is currently around $2.4 billion. This means you’re buying $1 of assets for 69 cents. That’s a substantial discount, and the highest it’s been at any time over the last decade.

For income investors, Brickworks has paid stable and increasing dividends for a very long time. There were no cuts during the GFC. In fact, the company has only cut dividends once since listing in 1962.

Dividends are well supported with the payout ratio being a very conservative 39%, as well as Brickworks receiving a healthy amount of income from its Soul Patts holding and property investments.

The outlook for building may slow, but Brickworks has enough underlying earnings from other industries that the company could ride out a downturn in construction comfortably. Management is conservative, long-standing and focused on remaining the lowest cost producer.

Shares trade for around 12 times earnings, and on a dividend yield of 3.3% fully franked.

Foolish takeaway

Brickworks is an easy to understand business, with built-in diversification, a long track record of success and capable management, trading at a hefty discount to asset value. If there’s one company on the ASX that Warren Buffett would buy today, this is it.

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Motley Fool contributor Dave Gow owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended TPG Telecom Limited and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Brickworks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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