Brickworks: Result 2012

For the year ended 31 July 2012, Brickworks announced underlying net profit of $78.9m, down 22%. The headline result was $35.6m lower again as a result of significant items, dominated by $31.6m of goodwill writedowns in several segments of the Building Products division. Directors declared a fully franked final dividend of 27 cents (ex date 1 Nov), bringing the yearly total to 40.5 cents, unchanged from 2011.

The Building Products division clearly struggled. Divisional EBIT fell 32% to $28.5m, from already-depressed 2011 levels. The majority of the decline was attributable to tougher market conditions and increased competition in Western Australia and Victoria. Australian dwelling approvals have fallen some 20% from the recent peak in 2010 and are now within earshot of the 2009 lows.

Management made the remark that never before in industry history has two such low points in activity been experienced just three years apart. But the 2009/2010 uptick in housing development was more government policy than a natural demand-driven turnaround, and a post-party hangover can hardly come as a surprise.

Unsurprisingly, Land & Development also experienced contraction, with EBIT down 35% to $19.0m. Increased earnings from the group’s property trust joint venture was more than offset by a sharp fall in land sales of the group's surplus land bank. The latter is lumpy by nature but lucrative over time, and Brickwork’s portfolio of surplus land continues to hold significant value—see Brickworks brick-by-brick of 30 May 11 (Long Term Buy – $10.42) for more detail.

The Investments divisions—predominately Brickworks’ 42.72% stake in Washington H. Soul Pattinson—contributed $67.7m to EBIT, down 0.3%, though the market value of the Soul Patts stake rose a touch over the year to $1.35bn. Brickworks collected $42.9m in dividends during the year, down 12% due to lower dividends from its sister company.

With its key assets being cyclical or lumpy in nature, Brickworks is best understood by a sum-of-the-parts analysis, with a focus on asset value rather than year-on-year changes in earnings. We intend to take a closer look from that angle in the near future. In the meantime, the valuation looks quite reasonable. The stock is little changed since 13 Jul 12 (Long Term Buy - $10.16) and remains a LONG TERM BUY.

Note: The model Growth portfolio owns shares in Brickworks.