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Edge7
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I am an Australian value investor. I have gone to full time investing this year (2012) at age 36 and am passionate about helping other Aussie investors succeed. My website is www.edgeseven.com.au
My company:
Edge Seven Pty Ltd
My blog:
Edge Seven Value Investing
  • ASX: BKW - Brickworks Limited 0 comments
    Jun 8, 2012 12:11 AM

    Brickworks Limited (ASX:BKW) is an innovative group of Australian-owned companies. Brickworks main business is the manufacture and distribution of clay and concrete products. The company is also involved in property development and investments. Brickworks operate in all states throughout Australia and in New Zealand.

    Brickworks is proud of its history - a long, unbroken tradition that stretches back to the days of the Great Depression. It was in 1934 that a group of leading Sydney brick manufacturers formed a company to ensure the ongoing viability of the local brick industry. The expansion of the company was rapid and its success assured through technological innovation and strong management.

    In 1961 the company listed on the Australian Stock Exchange and in 1969 entered a share-swap arrangement with the investment group, Washington H. Soul Pattinson (ASX:SQL). The cross-holding is one of the most successful in Australia's corporate history and continues to prosper. The cross-holding means that Brickworks has about a 43% shareholding in listed Washington H Soul Pattinson. In return, Washington H Soul Pattinson holds close to 50% of Brickworks.

    Does this business have a sustainable competitive advantage?

    Brickworks has a competitive advantage due to the number of strong national names it trades under such as Austral Bricks, Austral Masonry, Austral Precast, Bristile Roofing and Auswest Timbers.

    The business has manufacturing in a number of states across its network of building products businesses.

    Brickworks enjoys national sales coverage of its products due to its size and scale.

    The Brickworks business has diversified investment into other businesses courtesy of the large share holding in Washington H Soul Pattinson chemists. Washington H. Soul Pattinson also owns stakes in New Hope Coal, API, Ruralco and TPM Telecom which in turn add to Brickworks earnings.

    The business also own and develop a large portfolio of land holdings across NSW, VIC, QLD, SA, WA and TAS. Apart from the land in which their businesses operate, the company owns land which will be developed for residential and/or industrial potential worth another $340 million once developed. And, the business also operates a Property Trust which holds a further $500 million in property which is leased out at about 8% return to large transport and consumer businesses.

    What are the risks facing this business?

    Brickworks are largely dependent on the cyclical nature of the Australian housing construction cycle. High interest rates are one factor which has a large influence on the number of new homes built.

    The building products market is largely a price-driven business making it difficult for Brickworks to differentiate themselves on product and quality. While Brickworks can't do much to differentiate their product, they did develop a new brick factory at Wollert, Victoria in 2007. The new factory has greatly reduced their manufacturing costs and enhanced productivity via the robotic brick handling technology utilized.

    Is it run by able and trustworthy management?

    Management has a great reputation as very conservative and stable managers. They operate the business with a long-term outlook. Mr Robert Millner is the non-executive chairman of the Board. He has extensive corporate and investment experience. As a long term investor, Mr Millner is certainly a role model from afar for the author.

    The business is run with a conservative 16% net debt level compared to the company's assets.

    Is it trading at a bargain price?

    Brickworks is a difficult business to evaluate due to the level of property held on the balance sheet. There is arguably another $4.60 a share of property value to be added to the valuation figures below. The difficulty is that the approximate $4.60 a share worth of value does not generate regular earnings for the business. The business is asset rich and earnings poor compared to its equity. The current property development program and subsequent leasing & sales are timetabled over a 10 year period. So, all the real estate value is not planned to be realizable in the near term.

    The valuation figures below are based on the going concern that is the businesses earnings and not the property holdings. So, to be fair, these figures require the value of the property added.

    Rank2011 Actual ValuationToday's Share PriceMargin of Safety2012 Forecast Valuation2013 Forecast Valuation
    Gold 4$7.41$10.02-120.22%$4.55$4.62

    *Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

    (click to enlarge)

    Summary

    In summary, Brickworks is a quality company with good cash flow and experienced management. The company has a moderate level of debt and is a strong competitor in its market. The company has significant property holdings which can be commuted to cash incrementally in time which will allow the business to grow into future investments.

    This article is published by Dean Mico.

    The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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