The Brickworks Ltd (ASX: BKW) share price is under the spotlight after announcing a trading update and impairment.
Brickworks is one of the largest building product manufacturers in Australia. It’s also one of the larger brick producers in the US.
Weak US trading conditions
The company expects to include an impairment charge of A$74 million, or A$55 million after tax, for its North American business in its upcoming HY25 result.
Market conditions in North America are declining faster than expected. Those challenging conditions have continued throughout the FY25 first half, leading to a 13% reduction in revenue year on year.
Strong competition in the retail segment has resulted in “a loss of some market share at the company-owned Brickworks Supply store network”.
This reduced demand led to plant shutdowns during the period to control inventory levels. This meant plant efficiency reduced and there were higher unit manufacturing costs, hurting the EBITDA margin.
Subdued building activity and scaled-back production will “delay the realisation of benefits” which were expected to be delivered from previously closing some of its manufacturing plant network, while some upgrades have been completed in recent years.
Uncertainty around the timing of the market recovery, such as labour shortages, elevated material costs, interest rate uncertainty and geopolitical volatility, has resulted in a worsening of the shorter-term outlook.
Earnings outlook
The business expects the North American building products EBITDA will be “significantly lower” because of the above impacts and “unusually extreme winter weather conditions” in its key regions.
The Australian building products division is expected to deliver EBITDA that’s “broadly in line” with the HY24 result. Lower sales volume has been broadly offset by “portfolio rationalisation” and cost reduction initiatives.
Brickworks’ property division, which includes a large industrial property portfolio, will see EBITDA “higher” than last year, largely because there was a large hit to profit last year from a reduction in property values (which hasn’t repeated). Development profits are minimal because the Oakdale East estate construction is in the early stages. Net trust income (rental profit) is “marginally higher” year on year.
Final thoughts on the Brickworks share price
I think recent declines with the Brickworks share price are a long-term opportunity because of its property holdings and ownership of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares.
The weak building conditions aren’t a surprise to me, but I think the industrial properties and WHSP can increase their value over time.
If Brickworks shares fell further than today’s movement, I’d say it’d be a great opportunity to buy a bargain.
