Morningstar | No-Moat Brickworks Enters U.S. Brick Market With Acquisition; FVE Unchanged at AUD 15.30
No-moat Brickworks has entered the U.S. brick market, purchasing the fourth-largest U.S. brick manufacturer, Glen-Gery, for USD 110 million--representing a multiple of 8.4 times trailing 12-month EBITDA. The price paid appears sensible with Brickworks trading at 9 times EV/EBITDA. Glen-Gery earnings are expected to benefit from the continued upswing in the U.S. housing cycle, helping offset weakness in the Australian business. We now forecast a 5-year EBIT CAGR of negative 4.7%, up from negative 6.7% preacquisition. Fiscal 2019 EPS of AUD 1.13 per share is expected, with the deal being around AUD 4 cents accretive. But the deal is value neutral and we maintain our fair value estimate of AUD 15.30 per share. Brickworks shares continue to screen as fairly valued.Glen-Gery had sales of USD 115 million in 2017. It maintains market leadership positions across the U.S. Mid-Atlantic, Midwest, and North East corner with manufacturing and distribution operations across these regions. We note material overcapacity in the U.S. brick industry, however, with margins significantly impacted industrywide. Glen-Gery is no exception, achieving an underwhelming operating margin of 8.3% in 2017, comparing unfavourably with Brickworks' building products segment EBIT margin of 9.3% achieved in fiscal 2018. While we expect better capacity utilisation for Glen-Gery through the forecast period, industry overcapacity will likely constrain pricing and mute margin improvement. We therefore forecast Glen-Gery margins to firm to 10% by fiscal 2023.
Brickworks will fund the acquisition with debt. Upon completion, net/debt to equity is expected to increase to 22%, up from 15% at fiscal 2018 year-end. While this sits at group’s upper gearing limit of 20% net debt/equity, we see the debt level as manageable with interest cover to average 7 times over the forecast period. Further, free cash flows will allow for debt reduction and see net debt/equity falling to approximately 15% by fiscal 2023.
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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