EUR 850.00 For Business Accounts Only

Morningstar | No-Moat Brickworks to Batten Down The Hatches as Cycle Turns; Reiterate FVE on Transfer of Analyst

We reaffirm our AUD 15.30 per share fair value estimate for no-moat Brickworks, following a transfer of analyst. While our expectations for the building products segment have been marginally lowered, our increased fair value estimate from Soul Pattinson, or Soul Patts, offsets the negative valuation impact from our revised building product expectations.

Following the cyclical peak of building product earnings in fiscal 2018, we expect demand for bricks to soften through the forecast period with total housing completions to fall roughly 5.5% to 186 million in fiscal 2019 and a further 6.8% in fiscal 2020 to 174 million. We expect a 5% loss of market share for Brickworks over the five-year forecast period, revised from a prior expectation of no market share loss, to augment the cyclical downturn effect. We now expect a five-year brick volume CAGR of negative 3.2%. The effect of falling volumes, however, is offset by increased average selling prices yielding a five-year top-line CAGR of negative 0.3%, largely in line with our prior forecasts. Meanwhile, operating leverage will see EBIT margins fall an average 6.7% over the forecast period, down from 9.3% in fiscal 2018. Our revised midcycle EBIT margin expectations of 6.4% are thus lower than our previous expectations of 8.0% for the segment.

Our recent 7% increased fair value estimate of Soul Patts offsets the effect of the revised building products expectations, given Soul Patts now accounts for 65% of Brickworks’ total value. The increase in Soul Patts reflects our higher fair value estimate for New Hope on higher coal price assumptions and favourable movements in the value of other listed and unlisted investments in the past six months.

We revise our uncertainty rating to high from medium, reflecting both the high uncertainty rating assigned to Brickworks’ cross-shareholding in Soul Patts, and the highly cyclical nature of residential construction markets which the building products segment is exposed to.

While a small contributor to earnings, we expect the property segment to a provide steady stream of rental income and gains from property revaluation. In fiscal 2019, we expect AUD 33 million in earnings from the segment and expect growth of approximately 3% in earnings annually over the forecast period. These expectations reflect steady gross rental yield expectations of 6.2% of leased property assets and a weighted average steady cap rate of 5.2% for the portfolio.