A record underlying first half profit for Brickworks (ASX: BKW) has been marred by the underperformance of its Austral Bricks Western Australia business, which baked in a $32 million post-tax, non-cash impairment after failed attempts to improve margins and lost market share over the past half-year.
Total revenue rose by 13 per cent to $584 million, and this growth rate was outpaced by underlying profit which was up 24 per cent at a record $410 million.
Statutory profit however was down 38 per cent at $354 million due to two main factors.
The first is the fact Brickworks received a large windfall of $279 million following the merger of Washington H. Soul Pattinson (ASX: SOL) and Milton Corporation in the prior corresponding period, due to the disposal of some of its SOL shares through the process. Brickworks still holds more than a quarter of SOL shares on issue, and 'Soul Patts' as it is known also owns more than 40 per cent of BKW shares on issue.
The second contributing factor was a combination of $48 million in impairments and a $7 million loss from discontinued operations.
The lion's share of the impairments was attributable to Austral Bricks Western Australia, but the group also took a hit from plant relocation and recommissioning costs for its Oakdale East masonry plant and the new Horsley Park brick plant, both located in Western Sydney.
Brickworks reports its property division was a standout, with the highlight for the half being the sale of Oakdale East Stage 2 into the Industrial JV Trust with Goodman Group (ASX: GMG).
A reported strong uplift in market rent for prime industrial property underpinned a revaluation gain, despite the impact of increasing capitalisation rates.
"Despite increasing interest rates, we are continuing to experience strong demand for prime industrial property," Brickworks managing director Lindsay Partridge said.
"Major customers are seeking well-located sites, with large land footprints, on which to develop specialised, high-value facilities. The addition of a significant new parcel of land at Oakdale East is well suited to accommodate this demand.
"This new Estate will provide an additional development pipeline of around five years and once completed, is expected to deliver around $1 billion in additional leased asset value to the trust."
Across the rest of the portfolio, Brickworks saw a higher contribution from its investments, while earnings from its building products were relatively steady - a division that saw its sales rise by $364 million in Australia although earnings were down slightly due to performance issues with Bristile Roofing and Australia Bricks WA, while in North America revenue was up 18 per cent at $220 million and profits rose by a similar percentage.
"Sales have remained relatively robust across most businesses, despite a decline in new home sales. This is due to a large backlog of work from previous government stimulus, supply chain issues and tightness in the labour market, all of which have resulted in delays and extended construction timelines across the industry," Partridge said.
"Earnings within Austral Bricks were higher than the prior period, on the back of a strong performance in our two largest markets – New South Wales and Victoria.
"Improved earnings were also recorded by Austral Masonry, with the new Oakdale East masonry plant in Sydney fully commissioned during the period. We are seeing strong demand for many of our new masonry products and this is supporting continued expansion into additional markets."
Partridge also noted a strong uplift in earnings for Southern Cross Cement, adding a new cement supply contract that was secured in December was set to reduce costs further.
"Over the past few years, we have completed an extensive capital investment program across Building Products, including numerous plant upgrades, the JV cement import terminal in Brisbane and the new masonry plant," he said.
"The capital program will be capped off by the completion of our new Sydney brick plant within the next six months. This will allow the closure of Plant 3, at Oakdale East, and the consolidation of brick operations in Western Sydney to one site at Horsley Park.”
The rise in revenue in North America was mainly due to strong sales growth in the multi-residential segment and through the vertically integrated retail division.
"Although earnings in North America have not yet reached our expectations, we continue to make good progress on key strategic priorities," Partridge said.
"Over the past five years we have undertaken a plant rationalisation program that has seen the number of operating brick plants reduce from 16 to 8. This program continued during the first half, with the closure of the Caledonia site in Ohio.
"The reduced plant footprint has allowed a more focused capital investment program, and during the period extensive upgrades were completed at the Sergeant Bluff and Adel brick plants, both in Iowa."
Handmade products and brick slips were consolidated at Brickworks' Mid-Atlantic and Pittsburg plants, which management expects will facilitate more efficient production.
Partridge also pointed to the execution of a 10-year supply agreement with Brickability PLC for the sale of bricks into the UK market.
"This agreement marks a significant growth opportunity for Brickworks, with total market demand in the UK estimated at around 3 billion bricks per year. Of this, around 10-20 per cent is sourced from imports, due to a shortfall in domestic production capacity and demand for premium, differentiated product lines," he said.
Regarding the company's outlook, Partridge highlighted a strong development pipeline for the group's property trusts, with a "significant increase in rental income" expected over the coming years as new developments are completed and rent reviews are undertaken.
This prospect may explain the 3.73 per cent rise in Brickworks' share price today at the time of writing, offsetting tempered expectations for building product with sales set to remain "resilient" in the current half although there is "no doubt that a slowdown in activity will arrive before the end of the calendar year, once the existing pipeline of work is built out".
"The impact of the slowdown is likely to be more significant for our Australian business, where exposure to detached housing is greatest. By contrast, the North American operations have a broader end market exposure, and stand to benefit from the relative strength of the non-residential segment," Partridge said.
"Across both countries, manufacturing costs will benefit from the extensive plant rationalisation and upgrade activities completed over the past few years."
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