Brickworks (ASX:BKW)

Lindsay R. Partridge AM
MD
Market Cap (AUD): 2.51B
Sector: Materials
Last Trade (AUD): 16.75 +0.01 (+0.06%)
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1. About

Brickworks Limited is an Australian-owned group of companies with a long, successful, and proud history. The company has a long, unbroken tradition that stretches back to the days of the Great Depression. It was in 1934 that a group of leading Sydney brick manufacturers formed a company to ensure the ongoing viability of the local brick industry. The expansion of the company was rapid and its success assured through technological innovation and strong management. It is one of the nation’s leading providers of building products. From bricks to precast concrete panel, pavers, roofing tiles, and timber products the Company helps Australians to build the homes they want.

There are 3 main parts to the Brickworks business model:

  • The Building Products Group
  • The Land & Development Group, and
  • Investmentsmill

2. Business model

 

The Group operates the following divisions:[1]

 

Divisions

Revenue  ($’000)

% of Revenue

% of Profit (before Int, Tax, Depn & Amort)

Profit drivers[2]

Building Products

$819,980

99.9%

25.9%

  • Building Products EBIT was $76.0 M, up 16.8% on the prior year. Austral Bricks earnings were significantly higher on the back of a strong performance in New South Wales and Victoria
  • Performance in Western Australia also improved following a range of restructuring initiatives. Bristile Roofing, Austral Precast and Auswest Timbers earnings also increased whilst Austral Masonry was approximately in line with the prior year

Property

$801

0.1%

32.0%

  • Property EBIT was $94.0 M for the 12 months to 31 July 2018, up 3.7% on the prior year. This result was driven by a significant increase in earnings from the Joint Venture Industrial Property Trust following continued strong development activity during the year
  • The Property Division is also focused on opportunities for suitable land sales outside of the Property Trust. In May, the Company announced the sale of the Punchbowl brick site for $41 M, via a Call Option that has now been exercised

Investments

$303

0.0%

42.1%

  • Investments EBIT, including the contribution from Washington H. Soul Pattinson Limited, was up 19.8% to $123.5 M. This was due primarily to improved earnings from New Hope Coal and TPG Telecom. During the year, the value of Brickworks’ stake in WHSP increased by $427 M to $2.231 B

3. Strategy

 

There are 3 main parts to the Brickworks business model:[3]

  • The Building Products Group
  • The Land & Development Group, and
  • Investments

 

  • The Building Products Group consists of the following brands – Austral Bricks, Austral Masonry, Austral Precast, Bristile Roofing, Auswest Timber, Bowral Bricks, Daniel Robertson, Nubrik and GB Masonry
  • The Land and Development business exists to maximise the value of surplus land created by the Building products business
  • Investments represent 43% interest in Washington H. Soul Pattinson and has provided a stabilizer to its often volatile Building Products earnings stream
  • The Brickworks structure means that the Company are better placed to ride out the lows of the cycles
  • As a diversified business, Brickworks is less exposed to market volatility, thus enabling Brickworks to make long-term strategic decisions rather than take a short term approach

4. Markets

 

The Group operates in markets including:[4]

 

Industry (Australia)

Industry Revenue

Growth Rate

Cement and Lime Manufacturing

$3 billion (2018)

1.5% (Annual 13-18)

Clay Brick Manufacturing

$929 million (2017)

3.8% (Annual 13-18)

Ceramic Product Manufacturing

$502 million (2018)

(0.5%) (Annual 13-18)

5. Competition

 

Major competitors include:[5]

 

  • Adelaide Brighton Ltd. (ASX: ABC)
  • CSR Limited (ASX: CSR)
  • Boral Limited (ASX: BLD)
  • Fletcher Building Limited (NZE: FBU)

6. History

 

1934[6]   

At the height of the Great Depression brick manufacturers in the New South Wales Brick Masters’ Association took drastic action to save the industry. They registered Brickworks Limited as a public company, close unprofitable yards and rationalise production. The new company was better able to market and distribute bricks and clay products, especially pipes and tiles

 

1935   

Brickworks Limited continued bought shares from its investors (brickyard owners). Some sold up completely and closed their yards. By September 1939 Brickworks dominated the Sydney market   

 

1936   

Clay Industries Limited, a subsidiary of Brickworks Limited, bought the Manly Brick & Tile Company at Brookvale. That yard was contain millions of bricks but had not produced a single brick since the start of the Depression

 

1937   

Brickworks voted to become a private company. It raised capital and bought the assets of the Excelsior and Flemington Brick companies

 

1937 – 1938   

Brickworks purchased City Brick Co. Pty Ltd at Euston Road, Alexandria, on what is now Sydney Park. It continued to acquire more unprofitable companies or those running out of workable clays

 

1938   

Brickworks bought the Suburban Land and Investment Company (SLIC), an investment company which owned several brickworks. It gained an extra four fully equipped yards, the Burwood, South Ashfield, and Great Northern National. Brickworks Pty Ltd now owned 11 brickyards

 

1939   

Brickworks voted to revert to its original status as a public company

 

1942   

The Department of the Navy requisitioned the State Brickworks facilities and converted the kilns into ammunition stores. Brickworks made a claim for compensation and was paid out, although it still owned the site and plant

 

1945   

Brickworks acquired most of the shares in Austral Bricks

 

1950   

Brickworks gained total control of Austral Bricks, making it the biggest and most powerful single brickmaking company in Australia

 

1959   

Brickworks bought Rochedale Brickworks, Brisbane for the bargain price of £29,500, establishing a foothold in the Queensland market. Over the next decade, the plant was progressively modernised with the construction of Swindell-Dressler tunnel kilns

 

1961   

Brickworks acquired Punchbowl Brick and Pipe Company Pty Ltd, comprising Heathcote Brickworks, Kirrawee Brickworks and Punchbowl Brick & Pipe Works at Punchbowl

 

1962   

Brickworks Limited (BKW) listed on Australian Stock Exchange

 

1969   

BKW and Washington H. Soul Pattinson (WHSP) entered into a cross-holding arrangement

 

1985   

BKW now owned a 42.8% stake in Washington H. Soul Pattinson

 

1992   

Punchbowl Pipes Pty Ltd was renamed Austral Pipes Australia Pty Ltd

 

1999   

BKW acquired the Pioneer brick factory at Riverview, Queensland. Austral launched Slick Brick

 

2001   

BKW purchased a 19.6% stake in Western Australia-based, Bristile Limited, a manufacturer of brick, pavers and roof tiles. Austral launched its online ordering system – E Brick.

BKW acquired Bowral Bricks

 

2002   

BKW acquired Eureka Tiles Pty Ltd, a Victoria-based floor tile manufacturer. Eureka Tiles Pty Ltd and The Austral Tile Company combined to form Eureka Tiles Australia

 

2003   

BKW acquired 100% of Bristile Limited

 

2005   

BKW acquired Western Australian timber producer, Auswest Timbers

 

2006   

BKW acquired GB Masonry and Caloundra Blocks

 

2007   

BKW acquired Whitsunday Concrete and Block and Ayr Masonry

 

2008   

Brickworks Ltd acquired Smart State Blocks

 

2010   

BKW acquired Masonry plant from Brick and Block in Port Kembla, NSW

BKW acquired Sasso Precast Concrete

BKW acquired Girotto Precast Pty Ltd from Boral Ltd

BKW acquired Gocrete Pty Ltd from Boral Ltd

 

2011   

BKW acquired East Coast Masonry operations in Coffs Harbour, NSW

BKW acquired a timber mill and processing centre from Gunns Ltd in the South West of Western Australia

BKW created Austral Precast – making Brickworks Building Products division Australia’s largest producer of precast concrete panels

 

2012   

BKW acquired Masonry plant from Boral Ltd. in Cairns, Queensland

BKW acquired CPS Precast operations in Salisbury, Queensland

BKW completed the acquisition of the remaining 50% share of Daniel Robertson Australia Pty Ltd (following the formation of a 50/50 Joint Venture in 2006)

 

2013   

BKW acquired Masonry plant from Boral Ltd. in Cairns, Queensland                                   

BKW acquired Masonry plant from Boral Ltd. in Prospect, NSW

 

2014   

Brickworks Launched Australia’s first carbon neutral brick

 

2015   

CSR and Brickworks merged their New Zealand brick businesses

 

2017   

BKW sold its’ former brick making site at Malaga in Western Australia

 

2018   

Brickworks secures long-term east coast gas supply

7. Team

 

Board of Directors[7]

 

Robert D. Millner – Non-Executive Chairman

Michael J. Millner – Deputy Chairman

Lindsay R. Partridge AM – Managing Director

Brendan P. Crotty – Independent Non-Executive Director

David N. Gilham – Independent Non-Executive Director

Deborah R. Page AM – Independent Non-Executive Director

The Hon. Robert J. Webster – Lead Independent Director

 

Company Secretary

 

Susan Leppinus – Company Secretary and General Counsel

 

Management Team

 

Lindsay R. Partridge AM – Managing Director

Robert Bakewell – Chief Financial Officer

Mark Ellenor – Group General Manager –Bricks & Roofing

Megan Kublins – Executive General Manager – Property & Development


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8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/18 (ended 31 July):[8]

 

Divisions

Revenue ($’000)

% Change

Profit/(Loss) (before Int, Tax Depn & Amort) ($’000)

% Change

Building Products

$819,980

7.4%

$75,950

16.8%

Property

$801

(99.0%)

$93,970

3.7%

Investments

$303

35.3%

$123,498

19.8%

Total

$821,084

(2.5%)

$293,427

13.4%

9. Risk

 

Major risks include:[9]

 

The Board of Brickworks has adopted a Risk Management framework that identifies Risk Tolerance and Risk Appetite for the Group and then considers how each identified risk is placed within that framework.

 

Building Products

Energy Supply – sources and cost of gas and electricity

The Group continues to review upstream investment options, and alternative sources of gas while leveraging supplier relationships to ensure long term gas supply. Electricity is secured, where viable, through long term supply contracts.

 

Serious Safety Incidents

The Group has a strong safety culture and a well developed WHS system (refer further “Safety”)

 

Environmental incident

The Group has a comprehensive environmental compliance system and a strong commitment to environmental protection (refer further “Environment”).

 

Products – alternative products and product failure

The Group has a strong focus on research and development and quality control. The Group monitors market trends and has strategies to diversify its range of building products and its marketing approach

 

Shift in housing trend

The movement away from detached housing threatens the Group’s traditional market. The Group has strategies to diversify its range of building products and its marketing approach.

 

New competitor

Whilst barriers to entry are significant the Group monitors both domestic manufacturing and import competitors and has adopted a customer relationship and quality model, supported by investment in research and development.

 

Production capacity

The Group manages production capacity by restarting, building and mothballing plant to adapt to cyclical market conditions.

 

Business Interruption – plant failure or underutilisation and raw material supply

There are multiple facilities throughout Australia that can transport products between locations as and when required. The major facilities have rolling risk reviews and reporting by outside parties. The business also maintains significant insurance policies to manage the physical loss of assets and any loss of income from an insurable interruption. Raw materials are generally secured through ownership of raw material reserves and maintaining prudent raw material stockpiles. Log supply is continually monitored and the Group works closely with relevant Government authorities to ensure licencing renewals.

 

Asbestos Risk

There has been a comprehensive review of all locations for the presence of asbestos. Building cladding is regularly removed and replaced with non-asbestos based materials. Where any asbestos is found, either within a plant or during rehabilitation, it is immediately quarantined and removed by qualified reputable contractors, using the most diligent safety standards.

 

Market Risk – deteriorating market conditions

The Group is investing in geographic and product diversification, cost control and continuous improvement of business. Restructuring initiatives have been undertaken in WA to address the challenging market conditions including a pro-active approach to right-sizing our operations to match demand.

 

Property

Market Risk

The industrial property cycle may deteriorate, resulting in softening capitalisation rates and lack of growth. The Group manages the risk by monitoring the key economic drivers, employing property professionals who understand the property cycle and undertaking development in a joint venture with Goodman Group. The Group regularly conducts hold/sell assessments.

 

Serious Safety Incidents

The Group has a strong safety culture and a well developed WHS system (refer further “Safety”.

 

Property Trust Financing

The joint property trusts maintain facilities with multiple lenders with various tenors up to 7 years. In addition, gearing is maintained at prudent levels through the property cycles.

 

Rezoning Risk

The Group takes a long-term approach to achieve the highest and best use for each property. The rezoning process for a property usually commences prior to finalisation of its existing use.

 

Group

Financing Risk

The Group maintains conservative gearing levels below 20% in recognition of the industry’s cyclical nature. Senior debt facilities are maintained with financial lenders with whom an open and transparent relationship is maintained. Facilities are maintained over various tenors ranging from 2 to 10 years, ensuring that a maximum of $200 million will expire at any one point in time.

 

Cyber Security Risk

The Group has assessed its main cyber security threat as phishing to obtain sensitive company or private information or a virus attack which compromises the system. Investment in technology has increased and risk controls include the use of a VPN and antivirus software to safeguard against incoming viruses from personal computers. Preventative measures include regular system penetration tests and employee training. New leading-edge end-point protection software and firewall protection have been introduced. A disaster recovery plan is in place across the organisation.

 

Investment

Market Risk

The Group’s investment in WHSP is subject to market movements and the underlying performance of WHSP. The WHSP investment is diversified across industries other than those in which the balance of Brickworks specialises, which provides a stable stream of dividends over the long term. The WHSP group may have significant exposure to the Coal and Telecommunications Markets.

 

liquidity risk  

The Group manages liquidity risk by maintaining a combination of adequate cash reserves, bank facilities and reserve borrowing facilities, continuously monitored through forecast and actual cash flows, and matching the maturity profiles of financial assets and liabilities. The Group’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due. At 31 July 2018, the Group had $230.0 million of unused bank facilities (2017:  $142.0 million).  These facilities are subject to various terms and conditions, including various negative pledges regarding the operations of the Group, and covenants that must be satisfied at specific measurement dates.  A critical judgment is that the Group will continue to meet its criteria under these banking covenants to ensure that there is no right for the banking syndicate to require settlement of the facility in the next 12 months.  

 

Interest rate risk  

The Group’s main interest rate risk arises from fluctuations in the BBSY bid rate relating to bank borrowings. Where appropriate, the Group uses interest rate derivatives to eliminate some of the risks of movements in interest rates on borrowings, and increase certainty around the cost of borrowed funds.

 

Foreign exchange risk

The Group does not have any material exposure to unhedged foreign currency receivables. Export sales are all made through Australian agents or direct to overseas customers using Australian dollars or letters of credit denominated in  Australian dollars. The trading of the Group’s foreign subsidiary, which is in New Zealand dollars (NZD) is not material to the Group as a whole. Accordingly, any reasonably foreseeable fluctuation in the exchange rate of NZD would not have a  material impact on either profit after tax or equity of the Group.  The Group has a limited exposure to foreign currency fluctuations due to its importation of goods. The main exposure is to  US dollars (USD) and Euros (EUR). It is the policy of the Group to enter into forward foreign exchange contracts to cover specific currency payments, as well as covering anticipated purchases for up to 12 months in advance. 

 

Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the  Group. The Group has adopted a policy of only dealing with creditworthy counterparties. The credit risk on liquid funds and derivative financial instruments is considered low because these assets are held with banks with high credit ratings assigned by international creditrating agencies.  The maximum exposure to trade credit risk at balance date to recognised financial assets is the carrying amount net of provision for doubtful debts, as disclosed in the statement of financial position and notes to the financial statements. The  Group’s debtors are based in the building and construction industry, however the Group minimises its concentration of credit risk by undertaking transactions with a large number of customers. The Group ensures there is not a material credit risk exposure to any single debtor.  The Group holds no significant collateral as security, and there are no significant credit enhancements in respect of these financial assets. The credit quality of financial assets that are neither past due nor impaired is appropriate and is reviewed regularly to identify any potential deterioration in the credit quality. There are no significant financial assets that would otherwise be past due or impaired whose terms have been renegotiated.

 

Equity price risk

The Group does not have material direct exposure to equity price risk, as the value of its share trading portfolio is  insignificant, and hence any fluctuations in equity prices would not be material to either profit after tax or equity of the  Group.  The Group has significant indirect exposure to equity price risk through its investment in Washington H Soul Pattinson Co  Ltd (WHSP). Although this investment is accounted for as an equity accounted investment, WHSP has a significant listed  investment portfolio which is accounted for at fair value through equity, and contribute to the profit on subsequent  disposal. As a result, fluctuations in equity prices would potentially impact on both net profit after tax (where portions of  the portfolios are traded) and equity (for balances held at the end of the period) which would result in adjustments to the  Group’s net profit after tax and equity.  At the time of preparing this report, there was no publicly available information regarding the effects of any reasonably  foreseeable fluctuations in equity values on net profit or equity of WHSP at 31 July 2018 or subsequently.  

References

  1. ^ Annual Report 2018, P. 92
    https://www.listcorp.com/asx/bkw/brickworks/news/annual-report-to-shareholders-2000459.html
  2. ^ Annual Report 2018, P. 15
    https://www.listcorp.com/asx/bkw/brickworks/news/annual-report-to-shareholders-2000459.html
  3. ^ https://www.brickworks.com.au/about-us-strategy/
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=213
    http://www.ibisworld.com.au/industry/default.aspx?indid=208
    http://www.ibisworld.com.au/industry/default.aspx?indid=209
  5. ^ https://quotes.wsj.com/AU/XASX/BKW
  6. ^ https://www.brickworks.com.au/about-us-history/ https://www.marketscreener.com/BRICKWORKS-LIMITED-6492257/news/Brickworks-BKW-launches-Australia-s-first-Carbon-Neutral-Brick-18400629/ https://www.csr.com.au/investor-relations-and-news/csr-news-releases/2016/csr-acquires-borals-interest-in-the-boral-csr-bricks-joint-venture
    https://www.listcorp.com/asx/bkw/brickworks/news/austral-bricks-wa-consolidated-trading-update-1644236.html
    https://s2.listcorp.com/asx/bkw/brickworks/news/brickworks-secures-long-term-east-coast-gas-supply-1971619.pdf
  7. ^ http://www.brickworks.com.au/irm/content/board-of-directors.aspx?RID=173
    Annual Report 2018, P 59
    https://www.listcorp.com/asx/bkw/brickworks/news/annual-report-to-shareholders-2000459.html
  8. ^ Annual Report 2018, P. 92
    https://www.listcorp.com/asx/bkw/brickworks/news/annual-report-to-shareholders-2000459.html
  9. ^ Annual Report 2018, P 67 - 68, 107 - 11
    https://www.listcorp.com/asx/bkw/brickworks/news/annual-report-to-shareholders-2000459.html