Consensus community 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
September 20, 2018: Retail investors explain Soul Patts and Brickworks value gap (afr.com)
Plain text link: https://www.afr.com/chanticleer/retail-investors-explain-soul-patts-and-brickworks-value-gap-20180920-h15mh4
Retail investors explain Soul Patts and Brickworks value gap
The two companies at the heart of the longest cross shareholding in Australian corporate history have reported full-year financial results which have reaffirmed a significant divergence in the way they are valued by the market.
It is a bit of a mystery why the two companies controlled by the Millner family, Washington H Soul Pattison and Co and Brickworks trade at vastly differently levels relative to the inferred value of their net assets.
Soul Patts shares trade at about the same as the value of its inferred net assets while Brickworks shares trade at about a 28 per cent discounts to its inferred net assets. Recent movements in share prices have changed the value of inferred net assets but the discount gap remains about the same.
Todd Barlow, chief executive, and Rob Millner, chairman of Washington H Soul Pattinson have defended the Brickworks cross shareholding. [photo: Louie Douvis]
Of course, the biggest shareholdings of each company are shares in each other. Soul Patts owns about 44 per cent of Brickworks which, in turn, owns about 43 per cent of Soul Patts.
One logical explanation for the discount to net assets gap is that Robert Millner and Todd Barlow at Soul Patts have been much better at attracting retail investors than Lindsay Partridge at Brickworks.
Millner, who is executive chairman of Soul Patts and Brickworks, says retail investors like investing in Soul Patts because of its dividend growth and its defensive qualities in times of volatility.
Soul Patts is one of only two companies listed on the ASX that has raised its dividend every year for the past 18 years. The other company is Ramsay Health Care.
'Look through' valuation
Barlow, who is chief executive of Soul Patts, spends a lot of his time speaking to media outlets and brokers reliant on retail investors.
He says that over the past three years Soul Patts has seen a 58 per cent increase in retail investors on its share register from about 12,000 to 19,000.
Millner says Partridge, who is chief executive of Brickworks, will be doing more to attract retail investors.
One of the long-standing criticisms of the Soul Patts/Brickworks shareholding structure has been around its governance including its family control.
But Partridge says the family-owned nature of the business has allowed it to do things other companies could not.
He says the Soul Patts subsidiary New Hope Corporation was able to sit on $1 billion in spare cash for seven years before buying Rio Tinto's 40 per cent ownership in the Bengall coal mine joint venture at the same time coal prices had bottomed.
"Only family companies can do that sort of thing," Partridge said.
Last year, fund manager Perpetual failed in a court action to break up the cross shareholding.
Partridge says that while it is true that Brickworks has now published a "look through" valuation of its investments for the first time, this had nothing to do with the Perpetual court action.
"We are trying to show the inherent value in the group," he says.
Barlow said the market did not seem to have appreciated that about $1 billion in value was added to Soul Patts' investment portfolio in the month of August.
Soul Patts governance
Soul Patts shares were trading at $23.90 on Thursday morning, which is just above the inferred value of net assets of about $22.72. But if you add in the market value increases in August, the inferred value of net assets is $27.22.
Brickworks shares were trading at $16.31 on Thursday morning compared to a value for its inferred assets of $21.66.
If retail investor interest explains the difference in the valuation of the two companies that would fit with the analysis of leading fund manager Peter Cooper from Cooper Investors.
He said in an interview with Livewire earlier this year that Soul Patts is very unpopular with proxy advisers and institutional investors because of its governance.
But he said it is run by independently minded people who invest when values are on offer and are "very conservative and risk-averse when risk is abundant".
by Tony Boyd, AFR, Chanticleer
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Sure, it's over 4 years old (penned in September 2018) but it does explain a fair bit - and I (for one) did find it interesting. I think my online subscription to the AFR is one of the better decisions I've made over the years. I highly recommend it. I think it's costing me $59/month currently, as my cheaper introductory offer has expired and now I'm paying full price, but that only works out to $13.62/week (or $708/year), so it is what it is. I think it's worth it anyway.
Didn't realise how much of a brick manufacturer it IS NOT.
This is more of a listed investment company with a side gig to help with cashflow.
- Record underlying profit up 95%
- P/E of 8.1
From their AGM:
"Revenue of $890 million was down 6%. The decrease was primarily due to land sales revenue recorded last year, and the impact of exchange rate movements on Building Products North America revenue, when reported as Australian dollars.
EBITDA from continuing operations of $453 million, was up 61%, primarily driven by increased earnings from Property, Investments and Building Products Australia.
As the Chairman mentioned, underlying net profit after tax from continuing operations was a record, at $285 million.
This translates to underlying earnings per share of 189 cents.
After including significant items and discontinued operations, the statutory profit was $239 million, down 20% from FY2020, which included a large one-off profit in relation to our shareholding in WHSP."