Brickworks profit triples but kiln costs running hot on gas crunch

Despite building material manufacturer Brickworks (ASX: BKW) announcing a record underlying profit of $746 million for FY22, the company flagged it will face softer demand in the second half as rising interest rates impact the housing industry.

The group’s revenue grew to $1.09 billion year-on-year, reflecting an increase of 28 per cent. This was primarily driven by an uplift in the company’s North American brickmaker division, where revenue almost doubled to $399 million.

Meanwhile, manufacturer Building Products Australia recorded $694 million in revenue and an underlying EBITDA of $205 million – which includes an $89 million profit associated with the sale of properties into the Brickworks Manufacturing Trust.

The company’s statutory profit more than tripled to hit $854 million.

While the results were primarily positive, the company warned that a gas supply crunch on Australia’s east coast was creating extreme market volatility and price increases.

“The gas we use to fire the bricks in our kilns cannot be easily substituted for alternative renewable energy sources,” Brickworks chairman Robert Millner said.

“As such, ready access to reliable and affordable gas is essential for our industry. We only need to look to Europe to understand the cost of continued inaction by government.

“In that region, manufacturers are being forced to shut down operations, including some of our valued suppliers. To avoid a similar situation in Australia, it is critical that additional gas supplies that are reliable and affordable for domestic users are brought online as quickly as possible.”

Brickworks' other divisions - investments and property - also achieved higher earnings. Brickworks owns more than a quarter of Washington H. Soul Pattinson (ASX: SOL), although the latter also owns more than 40 per cent of the former. In its release today, Brickworks said its Soul Patts investment delivered outstanding returns, generating an underlying earnings contribution of $181 million, up 86 per cent year-on-year.

In late October, Brickworks also bought a large parcel of shares in robotic bricklaying technology developer FBR Limited (FBR), holding almost 20 per cent of the total shares on issue.

“We have maintained a keen interest in FBR since our initial seed investment in 2006,” Brickworks said.

“FBR recently commenced the commercialisation process for a bricklaying robot that has the potential to build walls faster than traditional methods, and with much reduced labour.”

At the end of FY22, Brickworks held almost $1.8 billion in net assets across two Joint Venture Property Trusts with property manager Goodman Group.

This includes a 50 per cent share in the Industrial JV Trust - which has grown assets in Australia and North America to $1.5 billion over the past decade - and a 50.1 per cent share in the recently launched $416 million Brickworks Manufacturing Trust.

Brickworks managing director Lindsay Partridge said the group is experiencing significant rental growth across new developments and lease renewals.

“This is expected to offset the impact of higher interest rates,” Partridge said.

“We are continuing to experience strong demand for our prime industrial property, which is being fuelled by long term structural tailwinds. To meet this demand, development activity in the short term will be focussed on building out the remaining vacant land at the Oakdale West Estate.

“We expect to complete the $300 million sale of Oakdale East Stage 2 into the Industrial JV Trust in the first half of FY23. Beyond that, we have identified three additional properties for potential sale into the Trusts over the coming years, to support continued long-term growth.”

However, he added the group expects a period of softer demand once an existing pipeline of work is completed.

“Whilst the start of FY23 has been positive, tightening monetary policy set to act as a handbrake on the housing industry in the medium term,” Partridge said.

“In Australia, this is increasingly evident in declining building approvals data and builders reporting reduced sales activity and display home foot traffic. In North America, we are more insulated from a housing slowdown, with a much larger share of sales into the non-residential sector, which is expected to remain resilient.”

“Across both countries, we have faced challenges such as labour and trade availability in many of our operations, albeit these issues have eased in recent months. Despite significantly higher diesel and electricity prices, we have been less exposed to the extreme energy prices than many other manufacturers, with long term fixed price gas contracts in place.”

Shares in Brickworks are up 1.05 per cent at $21.11 each at 1:19pm AEST.