The downturn in Australia's housing markets has turned upwards, according to the country's largest brick manufacturer.
In an article in the Australian Financial Review (AFR) yesterday, Brickworks Limited (ASX: BKW) announced that its orders began increasing in July and have increased each month since.
Brickworks manufactures brands Austral Bricks, Bristol Roofing, Austral Masonry and Austral Precast. Managing Director Lindsay Partridge told the AFR, "this will be the shortest downturn I've experienced." Housing markets in Sydney and Melbourne are recovering fast, however Western Australia is still struggling (a "basket case", according to Partridge).
Projects in the planning stage had been shelved as credit conditions tightened post Royal Commission. Smaller developers and investors are now revisiting these projects as demand increases for townhouses, duplexes, and low-rise apartments. According to Partridge, the recent downturn was no more than an "interruption" in a "long upside".
Here's a closer look at how Brickworks has fared during this "interruption" and what's in store for 2020.
Lower earnings in building products division
Earnings before interest, tax, depreciation and amortisation (EBITDA) for Brickworks' Australian Building Products division were down 18% in FY19 due to declining market activity and higher energy costs. Detached housing starts were down 10% in FY19, falling across all major states. From 1 January 2019 gas prices increased between 29% and 45% across east coast states, resulting in a $12 million increase in costs compared to the previous year, primarily within Austral Bricks.
Earning in 1H20 are expected to represent a low point for the division. High energy costs, low building activity, and difficult conditions in WA have impacted results. First quarter sales and earnings are down on the previous year, however order intake has progressively strengthened over the period with builders reporting increased home sales.
In response to subdued market conditions, Brickworks took the opportunity to undertake maintenance and capital upgrades at many facilities. These works entailed temporary plant shutdowns, which will have a further impact on earnings but leave Brickworks well prepared for the anticipated increased demand in future years.
North American expansion
Over the past year Brickworks has made three major acquisitions in North America, establishing the company as a leading brickmaker in the Northeast, Midwest, and Mid-Atlantic regions of the United States. In November last year, Brickworks purchased Glen-Gery, followed by Iowa based Sioux City Brick in August this year. The acquisition of Redland Brick assets is expected to complete in February next year.
Once the Redland Brick transaction is completed, Brickworks will have more than 1,000 employees, 12 brick plants, and one manufactured stone plant in North America. Brick sales in North America will be circa 400 million per annum, contributing around AU$290 million per annum in revenue.
Steady growth in construction activity is forecast for the North American market accompanied by low costs, in particular abundant cheap energy. Market conditions in North America should support solid growth, with low unemployment, low interest rates, a stable housing market and growth in non-residential building activity.
Investment division
Brickworks holds a 39.4% share in investment company Washington H Soul Pattinson and Co. Ltd. (ASX: SOL) or 'Soul Patts', which had a market value of over $2.1 billion at the end of the financial year. The Investments division contributed $56 million in fully franked dividends to Brickworks last financial year. These dividends allow Brickworks to make long term investment decisions despite cyclical downturns and underpin Brickworks dividends to shareholders.
Brickworks' investment in Soul Patts has delivered annualised returns of 11.6% over the past 15 years, 2.6% higher than the ASX All Ordinaries Accumulation Index (INDEXASX: XAO). Soul Patts has a 25.3% stake in TPG Telecom Ltd (ASX: TPM) and a 50% stake in New Hope Corporation Ltd (ASX: NHC), as well as $353 million invested in a diversified financial services portfolio and $265 million in healthcare and pharmaceuticals.
EBITDA declined 16% for the Investment division last financial year to $104 million. Brickworks sold 7.9 million SOL shares in November 2018 for $209 million with funds used to reduce Brickworks net debt following its acquisition of US-based brick manufacturer Glen-Gery.
Property
Brickworks' Property division delivered record earnings before interest and tax of $158 million last financial year, up from $94 million in FY18. The Property Trust held assets of almost $1.8 billion at the end of FY19. Borrowings of $490 million are held within the Trust giving a net asset value of $1.3 billion. Brickworks' 50% share of the net asset value was worth $633 million.
The Trust has a gross lettable area of 644,000 square meters, developed over the period since 2008. Over the same period, Brickworks' net asset value has increased by 18% per annum. Two developments are anticipated to be completed in the first half of the current financial year, driving growth in rental income. Each are tenanted on long-term leases.
Brickworks intends to sell 10 hectares of surplus land at Oakdale East into the Trust, which will underpin the results for the Property division in FY20. The land has been earmarked for the development of a mixed use industrial site including a new masonry plant to replace Brickworks' existing masonry plant at Prospect.
Development approval has been secured for 89 hectares of land at Oakdale West, which will provide for further growth over the next 5 to 10 years. Well-located industrial facilities, close to consumers, are subject to strong demand and increasing in value. Industrial zoned properties in prime locations such as those held by the Trust and Brickworks should continue to be in tight supply in coming years.
Dividends
Brickworks paid a full year dividend of 57 cents per share for FY19, up 6%, giving shares a dividend yield of 4.5%. Since listing on the ASX in 1962, Brickworks has decreased dividends only once, in 1975. As Partridge told the AFR, low deposit rates mean retirees in particular are seeking decent yield, but don't want to risk capital due to a short term share market downturn.
Foolish takeaway
Brickworks is leveraged to the Australian housing construction market, so stands to benefit from its recovery. The North American expansion provides geographic diversification, while Brickworks Property and Investments divisions provide sector diversification.
