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Here’s why the Brickworks (ASX:BKW) share price is suffering after its FY23 result

The Brickworks Limited (ASX: BKW) share price is down 7% after announcing a challenged FY23 result.

Brickworks is a large building products manufacturer, it’s the leader of making bricks in Australia. It also has a significant property portfolio, as well as a major stake of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).

FY23 result highlights

Here are some of the highlights from the 12 months to 31 July 2023:

  • Total revenue increased 8% to $1.18 billion
  • Underlying EBITDA (EBITDA explained) dropped 26% to $784 million
  • Underlying net profit after tax (NPAT) sank 32% to $508 million
  • Statutory net profit fell 54% to $395 million
  • Final dividend per share increased 2% to $0.42
  • Total annual dividend up 3% to $0.65

What happened?

For the WHSP FY23 result, you can check out our coverage here.

The building products EBITDA in both Australia and North America fell, with margins impacted by inflation pressures. This doesn’t help the Brickworks share price, in the short-term at least.

Building products Australia EBITDA was $100 million, down 13% excluding the one-off impact of the sale of land into the Brickworks Manufacturing Trust in the prior year. There was resilient demand with a large backlog of work under construction, however cost pressures increased across the supply chain. For example, Austral Bricks unit electricity costs were up 28% year on year and labour increased 13%.

North American building products EBITDA fell 18% to $40 million, with labour, maintenance and raw material additives, up 7%, 13% and 11% respectively on a per-unit basis. It has closed a number of plants, going from 16 to 7, increasing its plant utilisation from 46% to 72% resulting in a more modern and fuel-efficient fleet.

Property trust

The company said the property division saw another good year, with EBITDA of $506 million. It was down 21% compared to FY22, but it was the second highest ever achieved.

Property trust assets were revalued during the period, leading to a profit of $112 million. A significant increase in the assessed market rent for the leased assets more than offset the increase in the average capitalisation rate of the portfolio. That’s a helpful support for the Brickworks share price.

A development profit of $78 million was also recorded, following the completion of new facilities at the Oakdale West Estate during the year.

As developments are completed, rental income continues to grow, and net trust income for the year was $50 million, up 37%. That included $9 million in net rent from the Brickworks Manufacturing Trust, launched in July 2022.

Total assets held within the property trusts now stand at $5.8 billion. After including debt, Brickworks’ share of net assets was $2.27 billion at the end of FY23, up $520 million year over year. It decided to reduce gearing (debt levels) within the property trusts by retaining funds that may otherwise have been distributed.

There remains strong demand for industrial property, despite the increase in interest rates, according to Brickworks.

Outlook for the Brickworks share price

The company said that the development pipeline within property trusts remain strong, and rental income is expected to grow significantly in the coming years.

For building products, order intake is “now softening” with a decline in demand anticipated. Margins will be supported by price increases, and previously-implemented plant “rationalisation and upgrades”.

The exit of the loss-making Austral Bricks Western Australia business will “provide a positive impact on earnings.”

It continues to trade at an attractive discount to the underlying value of its assets, and I think those assets can keep growing in value, though it’s hard to say what the current value of the property assets are. WHSP and industrial property can keep growing the cashflow and capital value for Brickworks.

I believe the pullback makes the long-term opportunity more attractive.

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At the time of publishing, Jaz owns shares of WHSP and Brickworks.
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