Is Brickworks (ASX: BKW) a buy after providing a trading update to the market?
What is Brickworks?
was listed on the ASX in 1962 and has paid a dividend every year since then. The construction business has four divisions – Building Products Australia (eg Austral Bricks), Building Products North America (Glen Gery), Property and Investments (it owns 39.4% of Washington H. Soul Pattinson & Company).
What was in the Brickworks trading update?
The building products business has taken a number of actions to respond to the impacts of COVID-19.
It has reduced production to control stock levels across all of its building products operations. Brickworks has also accelerated its ‘plant rationalisation’ plants in the US. The Bigler plant has closed and the York plant has been converted to just one handmade kiln only.
Since the start of the year there has been more than 200 staff redundancies including the plant rationalisation activities. This is around 10% of the workforce, which amounts to around $20 million of yearly costs. All non-critical capital expenditure has been deferred indefinitely.
The company has accelerated initiatives like digital sales and marketing, new product lines, revamped product lines, online training and development programs.
How Brickworks’ divisions are actually performing
Management said that sales revenue for the four months to May 2020 in Australia was down 10% compared to the prior corresponding period. Brickworks said that it was resilient. Plant closures have helped cashflow, but impacted earnings. But Brickworks did generate a profit for this period. Pleasingly, it has received development approval for the new $125 million brick plant at Horsley Park in NSW.
In North America, the building products business there estimated like for like sales volume was down more than 30% in April and May due to lockdowns in many states. In the financial year to date this division has made a profit, but it has seen negative earnings in recent months due to COVID-19.
Development activity has continued at Oakdale in Sydney for the property trust. Civil works are underway. The $75 million Austral Masonry plant for this site has commenced construction.
Is it time to buy Brickworks?
The Brickworks share price is currently up around 1%. The medium term outlook for building activity remains unclear but governments in both Australia and the US have said that construction is important for a recovery. A shift to online shopping is expected to boost demand for Brickworks’ property trust. The company said it’s in a strong position, even with a lot of uncertainty.
I think Brickworks could be a good way to leverage an Australian economic recovery. The government has been saying how important construction is for the country. The WHSP shares should also add long term value creation for Brickworks over time. I would buy shares today for the long term.
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Disclosure: Jaz owns shares of Washington H. Soul Pattinson & Company at the time of writing, but this could change at any time.
