Brickworks Ltd (ASX: BKW) shares have seen their fair share of pain in the last year as a result of higher interest rates and lower demand for building products. As the chart below shows, the Brickworks share price is down by close to 20% since 8 March 2024.
Most assets suffered from the headwind of higher interest rates in the last few years. Legendary investor Warren Buffett once explained the importance of interest rates, explaining:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
So, in a broader sense, I do think Brickworks shares are primed to benefit. But, there are three reasons why I believe this company could be particularly exciting to own for at least the next 12 months if predicted interest rate cuts by the RBA occur.
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Building products
The Australian building products division has suffered from the headwind of high interest rates – it has seemingly reduced the demand for construction and renovation. In the FY25 half-year result, Brickworks reported the Australian building products segment's operating profit (EBIT) was down 2% to $22 million.
Brickworks explained that residential commencements continued to be at historically low levels, predominantly in the key markets of New South Wales and Victoria, with the multi-residential segment particularly soft. Current activity levels in this sector are the weakest they have been since 2012. Extended approval timelines and higher costs are hurting demand.
I think that an interest rate cut would be very beneficial for this segment.
Industrial property
Brickworks has a significant exposure to industrial property through its ownership of half of two different industrial property trusts, alongside partner Goodman Group (ASX: GMG).
The warehouses in the industrial property trust have a significant value, but interest rates have acted as a headwind for the valuations of those properties. Interest rate cuts could turn into a tailwind and boost the underlying value of the properties (and Brickworks shares).
A reduction of the interest rate, or multiple cuts, should lead to higher rental profits as it'll reduce the financing costs of the debt within the industrial property trust.
Investment division
One of Brickworks' main assets is its holding of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares.
While I'm not expecting Soul Patts shares to surge in response to a rate cut, its large investment portfolio could benefit from the overall boost for assets that lower rates could bring.
If the Soul Patts share price does rise, it could materially improve the underlying value of Brickworks shares. I'm also expecting the growing Soul Patts dividend to help fund higher Brickworks dividends in the coming years.
