Brickworks banks record profits but WA loss-making operations now considered “unsustainable”

Brickworks banks record profits but WA loss-making operations now considered “unsustainable”

Photo: Brickworks Building Products, via Facebook.

Brickworks (ASX: BKW) has produced a record $581 million profit in the December half, up 720 per cent and driven primarily by gains from offloading part of its shareholding in Washington H Soul Pattinson & Company (ASX: SOL) as part of its merger with Milton Corporation.

Prior to the merger, Brickworks had a 39.4 per cent stake in Soul Patts but that has since been reduced to 26.1 per cent, or around $2.6 billion as at 31 January 2022.

In turn, as of early October 2021 Soul Patts owned 43.25 per cent of Brickworks.

Taking away the impact of investment-related profit and other significant items, the building material manufacturer's underlying NPAT was still an impressive $330 million, up 269 per cent, after group revenue increased by almost a quarter over the same period to $535 million.

Brickworks' Australian products division, including brands such as Austral Bricks, Austral Masonry, Austral Precast and Bristile Roofing, was the strongest performing division in the group. After recovering from COVID related construction restrictions in Sydney and Melbourne during the early period, the business’s earnings before interest and tax (EBIT) rose 66 per cent on 1H21 to $27 million.

“The performance of Austral Bricks was particularly strong, with revenue and earnings higher in all east coast states,” Brickworks managing director Lindsay Partridge said.

“Brick sales have been supported by a long backlog of detached housing projects steadily moving through the construction pipeline.

“Performance was strongest in Queensland, where a significant uptick in building activity, market share growth and lower manufacturing costs all contributed to the improved result.”

Partridge says building products Australia has maintained a significant capital investment program to enhance its competitive position in key markets during the pandemic. The $75 million masonry plant in Sydney reached practical completion in July, and the commissioning process is almost complete.

By improving production efficiencies and increasing prices across most business units, Brickworks' Australian building products division could sustain higher margins despite supply chain difficulties and inflationary cost pressures in some areas.

According to Partridge, supply chain issues face continued pressure due to a stimulus-induced surge in demand. He cited the example of the business being impacted by a shortage of roof tilers across the east coast and a lack of available transport in Perth.

Predominantly due to the increased transport costs, which have led to increased prices by 20 to 25 per cent across the state, the future of the Western Australia business is now in jeopardy.

“Although sales have improved significantly in Western Australia, operations in this state remain loss-making and continue to be a drag on overall performance,” Partridge said.

“The current situation is unsustainable, and we will be forced to review our position in this market unless sales margins improve substantially during the remainder of the current upturn.”

With a burgeoning demand for prime logistics and warehousing space in Western Sydney and Brisbane, the group’s industrial property portfolio benefited from a substantial uplift in valuation.

Partridge says the business is in a strong position with a diversified portfolio and believes the company is on track to record over $1 billion in annual Group revenue for the first time.

“Within building products Australia, the start of the second half has been impacted by severe wet weather and flooding along the east coast. This has resulted in reduced construction activity in key markets such as Sydney and Brisbane,” Partridge said.

“However, underlying demand remains strong, and we are hopeful that all states will experience an elevated period of activity for the remainder of the second half.

“Once the current backlog of stimulus-induced housing work is completed, recent building approvals data suggests that a period of softer demand is likely.”

Partridge did preface that the ongoing situation in Ukraine has increased uncertainty and has the potential to impact all business divisions in various ways.

The company, employing more than 1,200 staff across New Zealand and Australia, which has either maintained or increased its dividend since 1976, lifted its first-half dividend from 21¢ to 22¢ per share.

Shares in Brickworks (ASX: BKW) rose almost 5 per cent for the day following the announcement of the results.

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