The S&P/ASX 200 Index (ASX: XJO) share Brickworks Limited (ASX: BKW) has several appealing factors that make it a great investment opportunity right now.
The company is facing several headwinds at the moment, including high interest rates, inflation, and higher manufacturing costs.
But there are a number of reasons why I think Brickworks shares can deliver strong returns over the long term at the current price, particularly once interest rates start coming down.
Here's why I'm bullish about Brickworks shares and thinking about buying more for my portfolio.
Population growth
Brickworks' operating businesses produce building products in Australia and the United States. It's the biggest brickmaker in Australia and the northeastern US. In Australia, it also produces roofing, masonry, timber battens, cement, and specialised building systems.
The populations of both the US and Australia continue to climb, requiring more dwellings. And larger populations will no doubt add to the long-term demand for products from Brickworks' businesses.
Construction can be a cyclical industry, so I think now is a good time to consider the business while sentiment is weaker. If interest rates have materially reduced in a couple of years, conditions for the ASX 200 share could be much stronger then.
Ongoing underlying growth
Brickworks owns around a quarter of investment conglomerate Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and half of an industrial property trust alongside Goodman Group (ASX: GMG).
Both of these assets are seeing longer-term growth in their operational profits, cash flows, and payments to Brickworks, which is driving up their value.
As the values of Soul Patts and the industrial property trust increase, Brickworks' underlying value lifts, too.
If Brickworks' balance sheet's value goes up over time, this can help increase how much the market is willing to pay for Brickworks shares.
Big asset discount
I love being able to buy businesses that are at a big discount to their underlying assets.
This ASX 200 share has significant asset backing across its building products manufacturing, the land it owns, the industrial and manufacturing property trusts, and the Soul Patts shares, though it also has a (relatively small) level of debt.
Every six months, Brickworks tells the market its underlying (inferred) asset backing. At 31 January 2024, the business had $36.68 of inferred assets per share. The Brickworks share price is at a 27% discount to the January 2024 figure, though the Soul Patts share price regularly changes to alter this discount.
In my opinion, it's a very appealing valuation discount.
