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Model Portfolio | The Brickworks Property Boom (ASX: BKW)

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Analyst: Hugo De Vries, Analyst

BKW’s property strategy continues to create significant asset value.

  1. BKW expects record property earnings in the first half of FY22 driven by further cap rate compression and better than anticipated development profits.
  2. An additional 121 hectares of land purchased in Southwest Sydney aids the long-term development pipeline.
  3. This is a positive update for BKW, and gives us further confidence in industrial property

We like the diversification BKW affords investors across building products, industrial property, telecommunications, mining and energy, financial services, and Australian equities. It was a reason as to why BKW remains one of the few ASX200 companies to have not needed to raise equity or receive government support payments during the COVID-19 pandemic.

The multi-channel income stream has also helped the company achieve the desirable record of maintaining or increasing dividends for the last 45 years.

Figure 1: Dividends

Brickworks normal Dividend has been maintained or increased since 1976

Source: BKW AGM Presentation 2021

 

We initiated on BKW in May, and you can read our initiation report here: Building value, brick by brick. As a quick refresher, the business comprises the following segments:

  1. Building Products Australia which includes Australia’s largest bricks producer Austral Bricks, and other brands such as Austral Masonry, Austral Precast and Bristile Roofing.
  2. Building Products North America which is brick producer in the North-east of the United States.
  3. Investments via its joint venture with ASX listed conglomerate Washington H Soul Pattinson (ASX: SOL)
  4. Property BKW has developed extensive industrial property assets with the help of a Joint Venture with another model portfolio constituent Goodman Group (ASX: GMG)

 

Industrial Property bringing the goods 

We have seen Industrial assets continue to appreciate due to a rapid growth in e-commerce and the demand for warehousing and logistics space that is required.

BKW announced to the market on Monday 13 December they were expecting record earnings from their property segment in the first half of financial year 2022. The group estimate property earnings before interest and taxes (EBIT) will be in the range $290-310 million. This compares to the entire FY2021 financial year property EBIT of $253 million (see figure 2 below).

BKW Managing Director, Mr. Lindsay Partridge remarked that, “Strong customer demand, development activity within the Property Trust has also continued at pace”, and that the beat was thanks to further capitalisation rate compression of 50bps, which takes the book to a portfolio average of just 3.6%.

The guidance upgrade was helped along by the soon to be completed state-of-the-art Amazon facility at Oakdale West in southwestern Sydney, (near the city’s second airport) which will bring with it significant development profits in this half earnings.

The BKW announcement also alluded to additional developments at the Oakdale Estates in western Sydney and the Rochedale estate in Brisbane which will land in the second half FY22.

Figure 2: Property – Long Pipeline of Further Development

Brickworks is a 50% shareholder in an industrial property trust with leased assets of $2.0 billion and a long development pipeline

Source: BKW AGM Presentation 2021

 

Adding to the landbank

BKW announced the acquisition of 121 hectares of land at Bringelly, in southwest Sydney. Settlement is likely to take place in March 2022, with an estimated value of circa $60m. On a longer-term view, the acquisition replenishes BKW’s land bank, providing future development potential once operational needs are completed. The acquisition of land is consistent with the company’s long term property strategy

Things to watch 

We will be monitoring industrial property cap rate performance across listed and unlisted assets, as well as the SOL share price. A concern on the horizon remains the cost pressures and supply chain impacts across the building products business.

BKW offers attractive, diverse exposure to tailwinds such as the Australian housing market and the highly resilient industrial property segment in the face of greater ecommerce adoption.

With a highly capable management team and a strong financial position, we believe BKW should continue to deliver self-funded sustainable long-term growth while maintaining a solid dividend stream, which sits currently at a yield of 2.6%. The stock is trading on a P/E of approximately 10x, and we are confident in our Clime Direct valuation which sits at $26.55, presenting circa 9% upside to the current share price.

 

Actions in the portfolio

  • Plan to participate in Corporate Travel (ASX: CTD) share purchase plan (SPP) when available. CTD announced intention to buy the AUNZ corporate and entertainment travel business off competitor Helloworld Travel (ASX: HLO) for $175m on a cash free debt free basis. 

The price paid equates to a multiple 5.8x FY2019 EV/EBITDA (FY19 for pre COVID-19 figures). The business segment is non-core for HLO, but it is for CTD. The deal is priced at $21.00, a 5.8% discount to the previous close. We intend to participate in the SPP on behalf of the model portfolio since we have a positive view on the continued recovery of corporate travel globally. A more detailed update will be provided next week.

 

Ownership Disclosures: 
Our fund partner Clime Asset Management (Clime) owns (BKW) on behalf of various mandates where it acts as an investment manager. All statistics referenced are sourced from the named Company's ASX announcements or share prices unless otherwise stated.

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