For me, building products business Brickworks Limited (ASX: BKW) is a high-conviction buy right now.
The Brickworks share price has drifted lower by 13.5% since 9 October 2020. I don’t think investors need to be negative about the business though. If anything, the outlook has been improving for the company in recent weeks.
The improving construction outlook
In terms of COVID-19, Australia is in one of the best positions in the world. There is hardly any community spread in the whole country. That helps the economy run much closer to normal.
Don’t get me wrong, the country isn’t totally back to normal. Many Aussies are still doing it tough. There are still hard borders between states. No international tourism is happening right now. But Victoria’s economy is finally opening up.
Australian house prices are rising again. I think this is likely to help the construction sector considerably. Ultra-low interest rates and easier lending make it more likely that the entire property market bounces back.
Brickworks is seeing growth for its order book and this will help drive profits higher in FY21. It has a number of quality brands that could see improving profits over the coming months.
Brickworks’ exciting industrial property trust plans
One of the key reasons why I think the Brickworks share price is a buy today is due to its industrial property trust that it owns 50% of, along with Goodman Group (ASX: GMG).
At the end of FY20, the Brickworks share of the trust was valued at $727 million, which was a 15% increase from the $633 million value from FY19.
The existing portfolio of properties is good industrial real estate, like warehouses. There are two warehouse projects that I’m particularly excited about.
It recently secured a lease pre-commitment for 20 years with Amazon at the property trust’s Oakdale West Estate in Sydney. The other major commitment is with Coles Group Ltd (ASX: COL). These high-tech distribution warehouses give Brickworks good exposure to high-quality tenants that want the best logistics they can buy. These warehouses are expected to increase the value of the trust as well as deliver more rental income.
After those two facilities are completed, the gross assets held within the various joint venture trust assets across Sydney and Brisbane is expected to exceed $3 billion.
The long-term growth of its major investment
Brickworks owns around 40% of investment house Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). Brickworks has been a shareholder for decades and this investment continues to deliver growing dividends for Brickworks.
As regular readers would know, Soul Patts is one of my preferred ASX share investments. The fact that Brickworks owns such a large amount of it is really attractive and makes Brickworks much more defensive in my opinion.
Soul Patts’ own portfolio continues to diversify over the years, which makes it even less risky for Brickworks.
The investment conglomerate has grown its dividend every year for the past 20 years.
In this era of COVID-19, any business that can display reliable dividend qualities is attractive. Brickworks hasn’t cut its dividend for over 40 years. I think that’s a great record of reliability.
At the current Brickworks share price it offers a grossed-up dividend yield of 4.8%. That’s a solid starting yield in this era of ultra-low interest rates.
At the current Brickworks share price it’s trading at under 17x FY21’s estimated earnings. I think that’s a very reasonable valuation, with the completion of the two new distribution centres not too far away. I’d be very happy to buy Brickworks shares today, whether the market falls further or rises from here.
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Motley Fool contributor Tristan Harrison owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Brickworks and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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.