Brickworks and Soul Patts: Result 2015
Recommendation
The construction boom is finally being reflected in Brickworks' financials with the business reporting a 19% increase in underlying net profit for the full year to $120m.
With construction levels near record highs, the building materials business was particularly buoyant, generating a 25% lift in EBIT to $56m while profit from Brickworks share of Washington H. Soul Pattinson rose 23% to $55m.
The property business is now the largest profit engine for Brickworks, generating EBIT of $64m, which highlights how much the company has changed. Three years ago, the Soul Patts holding contributed over 60% of profit; it now contributes just 30%.
Key Points
Building boom reflected in profit
Property business growing
Soul Patts contributes bulk of value
That partly reflects the collapse of coal prices and subsequent fall in earnings at New Hope Corporation, a major Soul Patts holding. However it also reflects the tremendous growth of the property business which is earning three times as much profit as in 2012, as well as improved conditions in the building materials business where profits have doubled over the same period.
More than the boom
There is little doubt building material earnings have been aided by a sensational building boom but the improvement is more than just a cyclical phenomenon. Consolidation in the brick, stone and hardwood industries has removed surplus capacity and resulted in price increases while the lower currency has aided export volumes, particularly in the hardwood business.
2014 | 2015 | Change, % | |
---|---|---|---|
Revenue | 670 | 724 | 8 |
U'lying EBIT | 143 | 166 | 16 |
U'lying NPAT | 101 | 120 | 19 |
U'lying EPS (cents) | 64 | 81 | 19 |
DPS (cents) | 42 | 45 | 7 |
Yield (%) | 2.8 | 3.0 | n/a |
The benefit is clear on the income statement. Higher prices added more than $15m to EBIT while higher volumes added $10m suggesting a lasting improvement in industry structure is worth more to the building materials business than current boom time conditions.
As we have noted before (see Brickworks, Soul Patts: Interim update), this particular construction boom has been dominated by apartments; approvals of high rises are at all-time highs while detached housing approvals are only slightly above average. We suspect the boom could persist for some time yet, especially in NSW, which faces enormous pent-up demand from a decade of undersupply, and sustained high population growth.
Despite all the good news, the materials business still generates a return on capital of less than 7% and a return on tangible assets of less than 10%. At best, this is an average business and will never generate outsized returns.
Hot property
Fortunately, Brickworks also includes an attractive property business that develops depleted sites into industrial property for lease and sale. Brickworks' share of rental income from the property trust, held in joint venture with Goodman Group, rose another 18% in the year to $15m. This is low-risk recurring income that grows as more land is developed and leased.
Holding | SOL share | Market cap | Market value to SOL | Disc value to SOL |
---|---|---|---|---|
New Hope | 59.70% | 1,392 | 831 | 582 |
TPG Telecom | 26.90% | 8,734 | 2,349 | 1,645 |
Brickworks | 44.20% | 2,241 | 1,244 | 727 |
BKI Investment | 11.10% | 938 | 104 | 73 |
Ruralco | 20.60% | 289 | 60 | 42 |
API | 24.60% | 796 | 196 | 137 |
Clover Corp | 28.60% | 36 | 10 | 7 |
Apex | 30.30% | 158 | 48 | 34 |
Equity portfolio | 580 | 406 | ||
Cash | 161 | 161 | ||
Sub total | 5,583 | 3,813 | ||
DTL | -255 | -255 | ||
Corp cost | -100 | -100 | ||
Total | 5,228 | 3,458 | ||
Shares on issue (m) | 240 | 240 | ||
Valuation, $/share | 21.78 | 14.41 |
It should be noted that more than half of the profit from the property business, $30m, comes from the revaluation of land rather than the receipt of cash. This is required by accounting standards and reflects the valuation uplift the business is producing.
Brickworks still holds a significant land bank so earnings from the property business should continue to climb steadily in the years ahead.
Soul Patts
Despite growth in its building materials and property businesses, the bulk of Brickworks' value comes from its 42.7% stake in Soul Patts, whose main holdings are a 44.5% stake in Brickworks, a 59.7% stake in New Hope and a 29.6% stake in TPG.
Soul Patts boasts a formidable record of success and was an early investor in TPG, a stake that has grown spectacularly and alone accounts for 65% of Soul Patts value. An updated valuation of Soul Patts is shown in Table 2 and highlights that the business is still good value.
It also carries a net cash position and yields about 3.4%. It is an excellent alternative to index hugging listed investment companies or ETFs for conservative investors. BUY.
Having risen 12% over the past year, Brickworks is now the dearer of the pair. Although this was an excellent result, Brickworks now trades at a slight premium to our buy price. We would likely upgrade again below $14 but, for now, HOLD.
Note: The Growth and Income portfolios own shares in Washington H. Soul Pattinson.