Is Brickworks the best stock to buy in the ASX 200 right now?

Brickworks looks like a top pick to me right now.

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A young male builder with his arms crossed leans against a brick wall and smiles at the camera as the Brickworks share price climbs today

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The S&P/ASX 200 Index (ASX: XJO) stock Brickworks Limited (ASX: BKW) looks to me like one of the best buys today.

I'm a big fan of buying quality businesses at a discount to what they're worth.

Brickworks has a few different segments. There's the Australian building products division, the North American building products segment, the property segment and its investment division.

The investments segment is useful because it diversifies Brickworks' asset base in areas like telecommunications, resources, financial services, swimming schools, agriculture and so on. Brickworks' stake in bricklaying robot business FBR Ltd (ASX: FBR) is intriguing, but not important at this stage.

Why I like Brickworks shares so much

For me, there's one key reason why it's such an attractive ASX 200 stock to buy – it's trading at a large discount to its net asset value (NAV), and those assets are very attractive.

At 31 January 2024, which was the ending date of its FY24 first-half period, Brickworks shares were trading at a 20% discount to the underlying NAV of $36.68. The underlying NAV discount fluctuates as share prices change, but I believe Brickworks is still trading at a high-teen discount in percentage terms.

The ASX 200 stock has strong rental potential

Brickworks owns half of a joint venture industrial property trust with Goodman Group (ASX: GMG).

The ASX 200 stock said strong demand is driving "unprecedented growth" in market rent for industrial property. HY24 rental income rose 17% to $81 million thanks to contracted increases and new developments.

In the next two to five years, Brickworks thinks the annualised rent can grow from $172 million and rise 51% to $260 million.

Brickworks noted land supply challenges are also being exacerbated by increasing construction and financing costs, and a range of planning and approvals issues. All of these factors have driven up rent for prime industrial property in Western Sydney by 55% in the past two years.

Brickworks said, at market rates, the rent potential of the property trust assets once fully developed is around $340 million, though it could take a number of years to fully realise this.

The ASX 200 stock said the forecast growth in rent will require no further capital from Brickworks, with the value of its land contribution at Oakdale East being matched by development funding from Goodman. On top of that, the low level of debt within the JV industrial trust will allow debt funding as required.

Solid dividend yield

As a bonus, the company has grown its annual dividend per share each year for the past decade.

It currently offers a grossed-up dividend yield of 2.48% at the current Brickworks share price. That's not the biggest yield in the world, but I think it offers a compelling payout while we wait for larger dividends from its investments and stronger rental profits.

Motley Fool contributor Tristan Harrison has positions in Brickworks. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks and Goodman Group. The Motley Fool Australia has positions in and has recommended Brickworks. The Motley Fool Australia has recommended Goodman Group. 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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