Morningstar | No-Moat Brickworks Trims Soul Patts Cross-Holding to Fund U.S. Acquisition; FVE Unchanged. See Updated Analyst Note from 03 Dec 2018
No-Moat Brickworks has marginally reduced its cross-holding in Washington H. Soul Pattinson & Co, or Soul Patts, to fund its previously announced U.S. acquisition, Glen-Gery. Brickworks generated proceeds of AUD 154 million, net of tax and transaction costs, by selling AUD 7.9 million of its Soul Patts holding. We view the sell-down positively, given the average sale price of AUD 26.37 per share was 1.65 times our Soul Patts fair value estimate. The net proceeds will fully fund the acquisition and we now expect net debt/equity to fall to 13% by fiscal 2019 year-end, down slightly from 15% at fiscal 2018 year-end. Brickworks’ interest in Soul Patts falls to 39.4% post sale, down from 40.2%. With the sell down only marginally accretive, however, valuation is unchanged at AUD 15.30 per share and Brickworks shares continue to screen as fairly valued. With lower earnings from Soul Patts and moderated top-line expectations for Glen-Gery, we now forecast a five-year EBIT CAGR of negative 6.5%, down from a prior negative 4.7%. We now expect EPS of AUD 1.17 per share in fiscal 2019, excluding one-off gains from land sales.We’ve also tempered our Glen-Gery top-line forecasts over the forecast period, owing to closer examination of its end market exposures. Approximately two thirds of Glen-Gery’s end market exposure is non-residential construction which we’d previously expected to track broadly in line with residential construction activity. On closer examination of nonresidential construction demand, which tends to be sensitive to economic growth and the level of growth attributable to fixed asset investment, we now expect U.S. non-residential volumes to increase at an average of 1.5% over the forecast period. As a result, Glen-Gery’s top line will likely grow at an average of around 3% over the forecast period, down from our prior 6% forecast. The revised Glen-Gery outlook leads to a reduction in Brickwork’s five-year top-line CAGR to 3.8%, down from 4.5%.
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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