Company Reports

Brickworks is a conglomerate consisting of building product manufacturing operations, property management, and a cross-shareholding in ASX-listed investment firm, Washington H. Soul Pattinson & Company, or Soul Patts.

Our AUD 31 per share fair value estimate for no-moat Brickworks is unchanged on the retirement announcement of long-standing managing director Lindsay Partridge. Partridge has led Brickworks since 1999 and will step down in July 2024. The current COO, Mark Ellenor, will succeed Patridge in the CEO role. Ellenor has been with Brickworks for 25 years, serving as president of North American operations and general manager of the building products business before he was appointed COO in late 2023.

Brickworks is a conglomerate consisting of building product manufacturing operations, property management, and a cross-shareholding in ASX-listed investment firm, Washington H. Soul Pattinson & Company, or Soul Patts.

We modestly lift our fair value estimates for Brickworks to AUD 31 (from AUD 30.50) and for Washington H. Soul Pattinson, or Soul Patts, to AUD 33 (AUD 32) after first-half fiscal 2024 results. Our revised fair value estimates reflect the time value of money. Brickworks reported an underlying loss of AUD 37 million, due to a noncash valuation downgrade in the firm’s property assets portfolio, and lower contributions from the firm’s cross-shareholding in Soul Patts. Nonetheless, management forewarned of an impending revaluation in late 2023; we had already incorporated this in our forecasts. Soul Patts' result was underpinned by robust growth in its strategic and private equity portfolios. Shares in Brickworks and Soul Patts screen at a 9% discount and a 7% premium to our fair value estimates, respectively.

Brickworks is a conglomerate consisting of building product manufacturing operations, property management, and a cross-shareholding in ASX-listed investment firm, Washington H. Soul Pattinson & Company, or Soul Patts.

We transfer coverage of Brickworks and Washington H. Soul Pattinson, or Soul Patts. The two companies are connected by a cross-shareholding which means Brickworks owns 26% of Soul Patts and Soul Patts owns 43% of Brickworks. As such, long-term expectations for the two companies affect both our fair value estimates.

We maintain our fair value estimates for Brickworks and Washington H. Soul Pattinson, or WHSP, of AUD 28.00 per share and AUD 26.90 per share, respectively. At current prices, shares in Brickworks trade at a 14% discount to our fair value estimate while WHSP trades at a 19% premium.

Brickworks is a conglomerate consisting of building products manufacturing operations, property management and a cross-holding in ASX-listed investment firm, Washington H. Soul Pattinson & Company, or WHSP.

We maintain our AUD 23.10 per-share fair value estimate for no-moat Washington H. Soul Pattinson following the prerelease of full-year fiscal 2021 results. We have increased our fiscal 2021 net income aftertax forecast by approximately 134% to AUD 334 million, toward the top end of management’s guidance of AUD 316 million to AUD 336 million. The sizeable uplift in earnings is largely attributable to the current favourable commodity environment, which has resulted in Round Oak Minerals--a long-term investment holding of Soul Pattinson--reporting a solid profit following several years of losses. Round Oak contributes negligibly to Soul Pattinson’s enterprise value. Nonetheless, as a wholly owned subsidiary, Round Oak’s results are fully consolidated into Soul Pattinson’s financial statements. Therefore, the financial results of Round Oak have an outsize impact on the income statement relative to the many unconsolidated equity holdings.

While the current lockdown of metropolitan Sydney--which aims to curb the spread of the coronavirus delta variant--is negatively affecting no-moat Brickworks’ sales in early fiscal 2022; we make no change to our AUD 22.00 fair value estimate. In fact, we anticipate a surge in building materials demand when restrictions end to more than offset the slow start.

Policymakers are increasingly cognizant of the significant contribution from the manufacturing processes, transport and disposal of building materials to the carbon-intensity of our built environment. Assessing the associated degree of carbon-risk associated with many building materials is a complex task—for detail, please see our special report “Combatting the Carbon Intensity of our Built Environment” dated July 27, 2021.

We upgrade our fair value estimate of no-moat Washington H. Soul Pattinson, or WHSP, by 9% to AUD 23.10 following its proposed merger by scheme of arrangement with Milton. Under the terms of the deal, WHSP will buy the remaining 97% of Milton that it does not already own and will finance the transaction using its own scrip. WHSP will pay a 10% premium to the underlying net tangible assets, or NTA, held by Milton. This premium is more than offset by WHSP being able to finance the transaction with its own presently overvalued scrip, which we estimate was approximately 43% overvalued prior to the announcement of the deal. Immaterial cost synergies are associated with combining investment houses. Therefore, our valuation uplift is derived solely from the net-benefit WHSP shareholders derive from paying for Milton’s assets with overvalued WHSP shares. In turn, we increase our fair value estimate for no-moat Brickworks by 6% to AUD 22.30 per share. Brickworks is WHSP’s largest shareholder.

Following the announcement of a AUD 200 million upward revaluation of property within Brickworks’ 50% jointly owned industrial property trust, we raise our fair value estimate for the no-moat name by 4.5% to AUD 21.10 per share. The property segment accounts for about 25% of Brickworks’ estimated enterprise value. We have also raised our fair value estimate for no-moat Washington H. Soul Pattinson, or WHSP, by 2.0% to AUD 21.20 per share given WHSP is Brickworks’ largest shareholder. Brickworks continues to screen at a modest premium of 11% relative to our revised fair value estimate, while WHSP shares trade at a sizeable 45% premium to our fair value estimate.

The Australian Government’s targeted and highly effective fiscal support of the residential construction sector leads us to materially upgrade our near-term outlook for housing commencements and alteration and addition activity. Certainly, housing-related stocks under our coverage are set to benefit from the recovery in fiscal 2022, boosting earnings and improving balance sheet metrics. But with fiscal support for the sector now winding down, the valuation benefit of our upgraded near-term housing commencement forecasts to our housing-related coverage is modest at best.

Brickworks is a conglomerate consisting of building products manufacturing operations, industrial property management and a cross-holding in ASX-listed investment firm, Washington H. Soul Pattinson & Co, or WHSP. The building products strategy has been to reinforce its position as the lowest cost brick manufacturer, the segment’s largest division. To this end, Brickworks has upgraded the majority of its brick plants, and consolidated plant operations where appropriate. As a "cycle profit" business, we view Brickworks’s strategy to continuously take cost out of the business positively. However, execution has been underwhelming with only meagre improvement in ROICs in the most recent cycle, having peaked at 5.9% in fiscal 2018. Therefore, plant rationalisation and upgrades only modestly improved returns from that of the prior cyclical peak in fiscal 2010, where a segment ROIC of 4.2% was achieved. More must be done to improve segment profitability.

Upon reflection of the various environmental, social and governance, or ESG, risks which Washington H. Soul Pattinson, or WHSP, and Brickworks are exposed to, we make no change to our respective AUD 20.60 per share and AUD 19.30 per share fair value estimates for the cross-shareholding linked pair. Equally, we retain our high fair value uncertainty ratings for the two no-moat names. While shares in Brickworks screen as approximately fairly valued, WHSP shares are materially overvalued, trading at a 56% premium to our unchanged valuation.

An improved medium-term outlook for no-moat Brickworks’ North American brick operations--combined with the revaluation of a number of no-moat Washington H. Soul Pattinson’s, or WHSP's, long-term investment holdings--drive upgrades to our sum-of-the-parts fair value estimates for WHSP and Brickworks to AUD 20.60 per share and AUD 19.30 per share, respectively. The increase in our fair value estimates for the cross-shareholding-linked names represent respective valuation upgrades of 8% and 9%. While shares in Brickworks screen as approximately fairly valued, WHSP shares are materially overvalued, trading at a sizeable 57% premium to our revised valuation.

Brickworks is a conglomerate consisting of building products manufacturing operations, industrial property management and a cross-holding in ASX-listed investment firm, Washington H. Soul Pattinson & Co, or WHSP. The building products strategy has been to reinforce its position as the lowest cost brick manufacturer, the segment’s largest division. To this end, Brickworks has upgraded the majority of its brick plants, and consolidated plant operations where appropriate. As a "cycle profit" business, we view Brickworks’s strategy to continuously take cost out of the business positively. However, execution has been underwhelming with only meagre improvement in ROICs in the most recent cycle, having peaked at 5.9% in fiscal 2018. Therefore, plant rationalisation and upgrades only modestly improved returns from that of the prior cyclical peak in fiscal 2010, where a segment ROIC of 4.2% was achieved. More must be done to improve segment profitability.

Brickworks is a conglomerate consisting of building products manufacturing operations, industrial property management and a cross-holding in ASX-listed investment firm, Washington H. Soul Pattinson & Co, or WHSP. The building products strategy has been to reinforce its position as the lowest cost brick manufacturer, the segment’s largest division. To this end, Brickworks has upgraded the majority of its brick plants, and consolidated plant operations where appropriate. As a "cycle profit" business, we view Brickworks’s strategy to continuously take cost out of the business positively. However, execution has been underwhelming with only meagre improvement in ROICs in the most recent cycle, having peaked at 5.9% in fiscal 2018. Therefore, plant rationalisation and upgrades only modestly improved returns from that of the prior cyclical peak in fiscal 2010, where a segment ROIC of 4.2% was achieved. More must be done to improve segment profitability.

Having reviewed our sum-of-the-parts valuations for Brickworks and Washington H. Soul Pattinson, or WHSP, we increase our per share fair value estimates for the no-moat-rated names to AUD 17.70 and AUD 19.00, respectively. The upgrade to Brickworks’ fair value estimate represents a 9% uplift relative to our prior valuation and is the result of an improved near-term outlook for Australian housing starts and our increased valuation of WHSP. WHSP is Brickworks’ largest contributor to its valuation--accounting for an approximate 60% of Brickworks’ enterprise value--by virtue of the cross-shareholding between Brickworks and WHSP. Modest increases to the valuation of a number of WHSP’s long-term holdings drive the 2% upgrade to our WHSP valuation. While Brickworks’ shares screen as approximately fairly valued, trading at a slim 3% discount to our revised valuation, WHSP shares screen as materially overvalued, trading at a sizable 45% premium to our revised fair value estimate.