I think the Brickworks (ASX:BKW) share price is a buy

I think the Brickworks Limited (ASX:BKW) share price is a buy after its FY20 report and news of relaxed lending for ASX banks.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

I think that the Brickworks Limited (ASX: BKW) share price is a buy after it reported its FY20 result and the news this week of relaxed lending for banks.

FY20 result

The Australian building products company said that its continuing revenue rose 4% to $953 million.

Brickworks' underlying earnings before interest, tax, depreciation and amortisation (EBITDA) fell 19% to $281 million, underlying earnings before interest and tax (EBIT) dropped 34% to $206 million and underlying net profit after tax (NPAT) declined 38% to $146 million. Underlying earnings per share (EPS) fell 38% to 98 cents.

Profit was impacted by COVID-19 and was down from a record result last year. Brickworks said there was a 12% reduction in total residential building activity. There were numerous plant shutdowns in the first half for maintenance and upgrades in Australia. In the second half COVID-19 caused shutdowns.

The building products Australia division saw EBIT fall 43% to $33 million and the building products North American division rose 63% to $10 million, largely due to Brickworks having a full 12-month ownership of those American businesses.

However, statutory profit rose 93% to $299 million thanks to its investment in Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) which benefited from the TPG Telecom Ltd (ASX: TPG) merger. The Brickworks share price has benefited from the strength of the TPG share price during COVID-19.

Brickworks also benefited from positive property revaluations with lower interest rates. The property trust, which it owns half of with Goodman Group (ASX: GMG) had a strong result with a development profit of $25 million and positive revaluations amounting to $53 million. The net trust (rental) income grew by 15% to $30 million.

Brickworks dividend

The Brickworks board decided to increased the final dividend by 3% to 39 cents per share. The full year dividend was increased by 4% to 59 cents per share.

That means that Brickworks hasn't cut its dividend for 44 years. That's one of the most reliable records on the ASX. It's very reassuring to know that over four decades the dividend has been maintained or grown every year.

Why I think the Brickworks share price is a buy

Brickworks said that the building products Australia division has seen rising orders and sales in September which reflected the various government stimulus measures.

That already shows that Brickworks has a promising outlook for FY21 with demand returning to somewhat normal.

The Brickworks share price grew strongly on Friday in reaction to news that lending laws would be relaxed for banks like Westpac Banking Corp (ASX: WBC) to make it easier for borrowers to access credit.

Brickworks could indirectly benefit from the lending changes because more lending could mean more construction across the country.

I think 2021 could show a good recovery for the construction sector with all the above elements, the low interest rates and COVID-19 impacts subsiding.

The investment in Soul Patts continues to do well and the Soul Patts share price has gone up more than 17% (at the time of writing) since the end of August 2020.

At the current Brickworks share price it's trading at 11x FY21's estimated earnings. I think this still seems like a very reasonable price to buy Brickworks shares.

It also offers a grossed-up dividend yield of 4.3%. I think that's a solid starting point for dividend investors.

The thing that most excites me about Brickworks is that Coles Group Limited (ASX: COL) and Amazon will soon be large tenants at the new warehouses being built by the property trust.

In the US, Brickworks is expecting a broad based increase in housing activity expected to offset non-residential weakness, especially in New York. Brickworks also said it has completed its plant rationalisation activities in North America which has improved efficiency and will drive profit margins higher.

Foolish takeaway

I like the diversification offered by Brickworks, each of its divisions look like they have promising growth, although investors may have to wait until after COVID-19 impacts dissipate to see Brickworks' construction earnings fully recover.

More on ⏸️ ASX Shares

a woman wearing a close-sitting hat featuring wires and thick computer screen glasses clutches her computer monitor and looks shocked and disturbed as she reads old-fashioned computer text from the screen.
Technology Shares

Here's why ASX 200 tech shares (ASX:XTX) outperformed today

ASX tech shares have taken a turn for the better today.

Read more »

Worker in hard hat looks puzzled with one hand on chin
Resources Shares

Why did the Rio Tinto share price (ASX:RIO) have such a lousy 2021?

We look at what happened to this ASX 200 mining giant's shares last year

Read more »

a miner wearing a hard hat smiles as he stands in front of heavy earth moving equipment on a barren mine site.
Share Gainers

Here's why the Rumble Resources (ASX:RTR) share price is climbing 5%

The mineral explorer's share price is on the rise amid promising drill results.

Read more »

share price high, all time record, record share price, highest, price rise, increase, up,
⏸️ ASX Shares

Here are the top 10 ASX 200 shares on Wednesday

Here are your top 10 biggest gainers in the ASX 200 on Wednesday.

Read more »

comical investor reading documents and surrounded by calculators
⏸️ ASX Shares

The ASX reporting wrap-up: WiseTech, Bravura, Seven Group

Just what the investor ordered. Here’s a recap of the companies that reported on Wednesday...

Read more »

Doctor performing an ultrasound on pregnant woman
⏸️ ASX Shares

The ASX reporting wrap-up: Ansell, Kogan, Nanosonics

Just what the investor ordered. Here’s a recap of the companies that reported on Tuesday...

Read more »

blue arrows representing a rising share price ASX 200
⏸️ ASX Shares

Here are the top 10 ASX 200 shares on Tuesday

Here are your top 10 biggest gainers in the ASX 200 on Tuesday.

Read more »

unhappy investor considering computer screen
Share Market News

The ASX reporting wrap-up: Charter Hall, Ampol, NIB Holdings

Just what the investor ordered. Here’s a recap of the companies that reported on Monday...

Read more »