WA building products, main blemish on Brickworks FY19 result.

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Brickworks turned in a solid scorecard.

Brickworks has investments and owns properties and large scale building products businesses in Australia and in North America.

The common thread in its portfolio is a core competency in brick and building materials manufacturing/distribution.

Along with this is a certain level of exchange rate and housing starts cycle insulation, given the North American building products business. There is also an element of corporate protection through a cross shareholding structure with WHSP, one of Australia’s best long term investors.

From an acquisitive growth perspective, the business has made standalone and bolt-on acquisitions in both markets, and is not shy to discontinue operations which do not live up to their hurdles.

The company is also investing in the digital economy. One example is its recent investment in a nascent downstream distribution channel, via a strategic stake in, and exclusive agreement to supply masonry blocks to, Fastbrick Robotics.

All in all, a strategically focused business with solid stakeholder stewardship at the helm.

Blemishes.

There were only two blemishes on its otherwise solid FY19 scorecard.

  1. Increased energy costs of ~$12m in Austral Bricks, with the company stating that gas prices had increased 29%-45% across the east coast states.

  2. Poor performance from the Australian building products division, particularly in Western Australia.

Western Australia conditions remain extremely difficult.

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In terms of housing starts, Brickworks data suggests that all states other than for the Apple Isle were in decline during FY19.

However, in a recent analyst presentation slide, Brickworks also stated :

“In Western Australia, market conditions remain extremely difficult. Within Austral Bricks, production is being progressively reduced to control inventory levels, and this had an adverse impact on manufacturing costs. This resulted in a significant decline in margins and earnings.”

I noted this ‘double whammy’ in my recent note, “Building materials face strong headwinds” and suggested that the headwinds currently effecting building materials companies in Australia are worse during a cyclical low because demand tends to be sporadic, causing a double whammy of volume and price.

Whether its shutting down kilns or using a weak Aussie dollar to import USD denominated raw materials to make cement, the effect is similar, a double whammy of pain.

Where to now?

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Brickworks already has a diversified portfolio in any case, but rather than resting on old economy girders, it has expanded overseas into growing markets and has made certain strategic acquisitions here in Australia in downstream products and new technologies - in search of competitive advantage.

Their competitors? The jury is out.

Stay tuned.

Mike.


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