Pinned valuation:
Valuation – BKW $30
I’ve spent some time this week, analysing the brickworks business which is essentially (property, bricks and soul patts) conglomerate.
Been taking notes on some of the write ups from other members and enjoy the breakdowns on how members analyse companies so here is my take on a very complicated but simple business. For those who are unsure of BKW cashflows are made up of Soul Patts dividends via its 26% ownership stake, JV Property Trust with Goodman and brick masonry business in Aus and Nth America.
Strategic
BKW earns 75% of its cash revenue from SOL dividends. As long as SOL continue their mandate to grow dividends currently at 9.6%pa, BKW will see continued increased cashflows, which allows them to pay their progressive dividends. Given the cross shareholding and board representation, I don’t see this changing in the short to medium term so you really are buying SOL under a different asx company. Something I’ve made reference to before in previous posts
A growing portion of income comes from very complex property transactions ie rent, land sales and property development. They have a JV trust with Goodman group which earns them 50% of the returns. This deal seems to be based on using Goodmans prop dev expertise and BKW providing the land. In their latest HY they make note that of there is no further BKW capital investment in property developments to realise rental uplift across the property portfolio. They still have optionality with other surplus land that sits within the BKW Manufacturing Trust.
The remaining income comes from the brickworks business which has undergone a complete overhaul the last 3-5years incl plant rationalization, reduced headcount and site efficiencies. The brickworks business has ridden the downtrend of the construction industry but BKW have invested heavily in the business to take advantage of what they term as the next building boom over the next decade, primarily in residential construction, and based on our national housing shortage, this thematic plays well.
Opportunity
I believe this is a simplistic asset play based on where it is trading right now. However the long term planning and foresight of management to develop the property business that takes advantage surplus land gives it a unique optionality that I don’t believe is factored in to the current share price. This combined with the security of a growing dividend underpins by the large 26% holding of SOL gives some confidence in the cashflow resilience of the business long term.
Risks
The higher for longer IR macro certainly has impacted BKW over the last couple of years, and will continue to impact the business. I expect the share price to swing in response to IR movements or expected IR movements. Note the Nth America business makes up a tiny % of the overall income for BKW, so much of the impact is based on AUS IR.
Fundamental
I’m expecting a full year decrease in profit based on the PCP in terms of how BKW report their financials. However if you look through and behind their very complicated financial reporting there is a steady stream of cashflows priced at a discount in my view with largely fixed cost base.
With BKW trading around $27 the SOL portion is worth about $21 (94,314,855 SOL owned shares X $33.58 SOL price / 152,550,751 BKW Shares outstanding). This leaves the Property JV trusts and Brickworks together to be valued at a combined $6per share. This includes A growing JV Property net income of $50m + brick business with EBIDTA of around $140m pa..
The BKW NTA is $19per share, share price is currently $27 currently and BKW inferred fully realised market value is $37. The intrinsic value is somewhere between $27 - $37.
Technical
After the HY result which declared statutory profit losses over $50m based on decreased land valuations combined with a macro sentiment turning after overshooting since November on rate cuts, the share price has fallen 15% to $27. Sitting just above the 200EMA the price seems to have found support around the $26 mark and there is a simple reverse head and shoulders that has formed.
Final Thoughts
I am putting a $30 valuation on this business and its definitely a long term compounder that has some upside and could re-rate quickly if interest rate falls. Ive held my full allocation in SM and have added to my SMSF in RL.
Let me know what you think
I recently initiated about a 1/3rd position in Brickworks, at around $26. It was a bit more than I would have liked to pay, but I was tired of waiting for just that bit lower. It is intended to add some ballast to the portfolio as a boring, steady, income play, though the current yield is not particularly attractive, just average. I would prefer to have SOL (a company I bought during the nadir of the Covid crash and sold for a quick double less than 2 years later), but BKW is looking more attractively valued on a relative basis while still providing exposure to SOL.
I haven't had a chance to dive into their report released today, but the headline numbers aren't looking great. And yet the shares are being re-rated strongly (by the company's usual standards anyway). Is the market anticipating some sort of bottom in the property-exposed parts of the business given the imminent turn in the interest rate cycle (already in place in the US of course)?
@west im a holder, it is one of those stocks whose value should increase moderately over time, so probably not spicy enough for some.
an issue with the valuation is the cross-share holding where SOL is dependent on BKW and BKW is dependent on SOL. less of an issue now post Milton. I remember Adsteam had horrendous cross-shareholdings that were impossible to work through (a lot of debt in that case as well). There has been a significant change in SOL strategy, you have to work out whether you like that or not and that the future returns will reflect the past, given the t/o of Milton and the change in the investment mix.
these guys are quite conservative and rational and should add value over time. i just put a bit of my daughter's trust money into it and that's how I view BKW/SOL. you will look at it in 5 years and find a reasonable appreciation without undue risk. im a buyer at $26 so close to current,
@west - nice succinct and clear assessment.
I don't really know $BKW well, and have often thought I should pay it some attention. The reason for this is its complex structure, which you've described very well. Part of this is that you have to understand $SOL to understand $BKW.
With one exception ($MQG), I only hold companies where I can develop a clear understanding of the economics of the operating business, and for $BKW there are too many moving parts for me. So, my lack of interest in $BKW is that I tend not to invest in conglomerates or investment companies ,.... but never say never!
One question I have on your writeup is: where do you get "and BKW inferred fully realised market value is $37"?
So, having made clear that I don't really understand this business, I agree with you that - based on its track record and the asset revaluations driving the recent loss (which explains the SP drawdown) it seems reasonable to propose that this is a good time to buy for a long term investor.
The 7 covering analysts reported by marketscreener.com agree, as their range around the target price is $27.30 - $37.50, or $30.59 at average. Bang on where you have it.
So, considering the FF dividend in addition, it looks like a >15% rate of return looks achievable, with a favourable risk-reward profile, if you believe the analysts.
thanks @mikebrisy
the inferred asset backing assumes the market value of their assets. This is the slide below from a recent investor presentation. I could have worded it differently to make it clearer in retrospect.
Agree this is a complex conglomerate. Simple but complex, therein lies the opportunity maybe that others don't want to go to deep...
@west I’m not 100% sure if your assertion about the susceptibility to US vs AUS interest rates is correct.
According to the FY23 annual report it looks like they have slightly more drawn USD debt than AUD debt. That said, I think they have pretty conservative debt covenants so I don’t see this as a massive risk and I also note that they have quite a bit locked in for a couple more years with only two tranches needing to be rolled over shortly.
I like your analysis, but I wonder whether driving it from the basis of their investment portfolio (i.e. mainly SOL) is going at it the wrong way around (i.e. its assuming the SOL share price is right and then analysing the rest). I’m a holder IRL of both SOL and BKW, I always struggle getting my head around valuing the cross holding. It’s not one I’ve looked at recently as I haven’t had money to top up either but getting rid of some DRO recently, I probably should look at reinvesting some of those proceeds in some more sensible companies.
My concern about SOL (and indirectly about BKW as a result) is that TPG has been languishing for a while and I think the abnormally high dividends over the past couple of years they have had from NHC are likely to moderate (I’ve noted that NHC has dropped by about 20% in market cap in the last year as well).