The S&P/ASX 200 Index (ASX: XJO) stock Brickworks Ltd (ASX: BKW) looks like a very good opportunity to me.
I really believe the business has an exciting future – I recently decided to buy some more shares for my own portfolio.
There are a few different reasons why the business seems undervalued to me. For starters, the Brickworks share price has dropped 18% since 8 March 2024. I love being able to buy excellent businesses when they're trading cheaper if they have a compelling long-term future.
Brickworks does have a great long-term future, in my opinion, due to a few factors, which I'll discuss below.
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Interest rates to boost building product demand for ASX 200 stock?
After keeping the official cash rate at 4.35% for over a year, the Reserve Bank of Australia (RBA) decided to cut the rate by 25 basis points (0.25%) to 4.10%.
The Australian construction sector has faced various headwinds. The most problematic has probably been the high interest rate imposed in response to elevated inflation.
With an interest rate cut already delivered and possibly another/more in the next 12 months, I think this could be an opportunity for a rebound in demand for the company's bricks, paving, roofing, cement, stone, masonry, cement, timber battens, and so on.
With how the ASX share market is forward-looking, I think the Brickworks share price could recover before there's a significant turnaround for its Australian building product division.
Strong outlook for industrial property demand
The ASX 200 stock has significant exposure to industrial property through its ownership of half of an industrial property trust. Its partner is industrial property leader Goodman Group (ASX: GMG).
The property trust owns completed and prospective industrial property estates in Australia's largest cities. The trust has multiple major businesses as tenants in large warehouses such as Amazon and Coles Group Ltd (ASX: COL).
This asset is already contributing significant rental profits and distributions to Brickworks' financials.
An interest rate cut and future cuts could increase the value of the properties and reduce the cost of debt, which would be a double positive.
Rental income could grow from the increasing demand for warehouse space due to tailwinds like e-commerce growth, refrigerated space demand (with fresh food and pharmaceuticals), data centres, and so on. Further warehouse completions in the coming years can also drive total rental income higher.
Excellent investment division
An extremely useful bonus to investing in this ASX 200 stock is that it owns approximately a quarter of the investment house Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
Soul Patts has been listed on the ASX for over a century, and its diversified portfolio in industries like resources, telecommunications, agriculture, and swimming schools provides a largely uncorrelated earnings profile to building products.
Owning Soul Patts shares has given Brickworks stability in its underlying value and steadily rising dividends. Soul Patts has grown its annual ordinary dividend per share each year since 2000. This asset has enabled Brickworks to not cut its payout for almost 50 years. Brickworks has increased its annual dividend each year over the past decade.
