I think that the Brickworks Limited (ASX: BKW) share price is a buy right now.
COVID-19 impacts are currently still being felt across the country, particularly in Melbourne.
However, there seems to have been a shift in mentality about property.
Looking at the recent house price forecast by Westpac Banking Corp (ASX: WBC), the bank's economists think Brisbane house prices could jump 20% over two years to mid-2023, whilst Sydney prices could rise 14%, according to reporting by the Australian Financial Review. Other cities are also expected to see double digit price rises.
I think that bodes well for property-related businesses such as Brickworks which could benefit from improving sentiment.
In my opinion, Brickworks is a buy for two main reasons:
Current Brickworks valuation is backed up by assets
The existing Brickworks market capitalisation is mostly backed up by the pre-tax asset values of its two key defensive non-construction assets.
The ASX share owns around 40% of investment conglomerate Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) which has a value of around $2 billion. Soul Patts owns businesses in a number of different industries including telecommunications, building products (it owns a large chunk of Brickworks shares), resources, pharmacies, agriculture, financial services, swimming schools and property. Soul Patts is steadily growing its dividend and portfolio value, which benefits Brickworks.
Brickworks also owns a 50% stake of an industrial property trust along with global giant Goodman Group (ASX: GMG). Brickworks' share of the net tangible assets (NTA) was $710 million at the end of the first half. The properties are built on surplus Brickworks building products land.
In the first half of FY20 Brickworks reported that the total return on the lease property assets was 17%, comprising a rental return of 6% and revaluation return of 11%. Brickworks says there is strong demand in industrial land, reflecting structural changes across the industry.
Development land held within the trust will support continued development and "further growth for many years to come." Indeed, the property trust is currently building two large, high-tech distribution centres for Coles Group Limited (ASX: COL) and Amazon. Once those two warehouses are complete the gross assets value within the trust is expected to be more than $3 billion.
It's good to buy cyclical shares during difficulties
I don't think the property trust and Soul Patts shares are cyclical, but building products demand can be very cyclical.
Brickworks is the market leader for bricks in Australia. It also produces and sells a variety of other products like paving, masonry, roofing, precast and so on. The ASX share is also the market leader in the north east of the US after making some acquisitions.
In the four months to May 2020, Brickworks said that Australian building products revenue was down 10% and the North American operations had seen like for like revenue fall 30% in April and May.
The Brickworks share price is still lower than the pre-COVID-19 price, so I think that reflects market uncertainty about construction earnings.
In my opinion, the best time to buy cyclical earnings like construction is when sentiment is low. The best time to have bought shares was during April 2020 and May 2020. Brickworks has rallied strongly since then, but I still think it's a buy.
Bonus: A good dividend
Brickworks has one of the most reliable dividends on the ASX. It hasn't cut its dividend for over 40 years. That's a very strong record in my opinion. The dividends and distributions from Soul Patts and the property trust alone support the current dividend from the ASX share.
Foolish takeaway
At the current Brickworks share price it's trading with a grossed-up dividend yield of 4.4%. It's priced at 11x FY21's estimated earnings, which seems like a very reasonable price to me. I'd be happy to buy Brickworks shares today and buy more on price weakness.
