Morningstar | Brickworks Remains Fairly Valued, but Competitive Pressures Preclude a Moat
We raise our fair value estimate for no-moat-rated Brickworks ahead of reporting season to AUD 15.30 from AUD 14.70. The increase stems mostly from the time value of money, alongside the recent small move in our fair value estimate for cross-owned Washington H Soul Pattinson. Our long-term thesis, however, remains intact. Brickworks enjoys a strong position in bricks, but this product is commoditised and easily substitutable. We continue to believe the brick industry is in decline, precluding a moat for Brickworks, as newer materials continue to gain share. Nevertheless, last trading at AUD 15.62, shares in Brickworks are at a level we consider fair.Brickworks has a leading market position in bricks under the Austral brand, and enjoys a duopoly with CSR's PGH, together representing 90% of the market. However, Brickworks competes not just with brick manufacturers, but with alternative building materials as well. As alternatives such as pre-cast concrete, fibre cement, and engineered wood are less labour-intensive and quicker to construct, these newer materials continue to gain share.
We recently increased Soul Pattinson's fair value estimate to AUD 15.00 from AUD 14.10, reflecting our higher fair value estimate for part-owned New Hope Corporation, the favourable acquisition of the Jaguar operation from Independence Group, and the time value of money. We estimate the 42.72% interest in no-moat-rated Soul Pattinson makes up about two thirds of our Brickworks valuation, with the Brickworks construction products and property development businesses contributing only about AUD 5 per share to our fair value estimate.
Brickworks manufactures a range of building products throughout Australia, engages in development and investment activities, and participates in investments as an equity holder. Co. has business three segments: building products, which manufactures vitrified clay, concrete and timber products used in the building industry with product lines that include bricks, blocks, pavers, roof tiles, floor tiles, and timber products used in the building industry; property, which considers further opportunities to better utilize land owned by Co.; and investment, which holds investments in the Australian share market, and includes investment in Washington H. Soul Pattinson and Co. Ltd.
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