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Challenges Ahead For Brickworks

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Brickworks ((BKW)) has substantially upgraded its guidance for net profit in FY17,  as a result of continued strength in its land & development portfolio. Building products on the east coast are also robust and holding strongly for now, although brokers suggest the headwinds may be mounting.

The company has upgraded underlying net profit guidance, signalling growth of 25% in FY17. Statutory net profit is expected to be around double FY16.  While brokers note the timing of property and land developments can usually push profits around, this upgrade is accompanied by a much weaker outlook for building products.

The company now expects FY17 building products operating earnings (EBIT) to be lower than FY16, primarily because of difficult market conditions related to weather as well as restructuring in Western Australia. All Queensland operations were closed for a period after Cyclone Debbie, and brick plants in NSW were affected when they were taken off line for long overdue maintenance.

Deutsche Bank reduces its FY17 building products operating earnings estimates for Brickworks by -8% but increases overall FY17 net profit estimates by 6% and retains a Buy rating on valuation.

Macquarie observes the company's investment portfolio is enjoying coal-related tailwinds although growth should moderate in FY18. Meanwhile land & development has ongoing options for capital and profit releases.

Building Outlook

Building products operating earnings on the east coast are still expected to be higher than FY16, with a strong performance from Austral Bricks. The order book is observed to be very strong across the east coast businesses and delays caused by wet weather have simply resulted in extensions to the pipeline of work.

Citi believes the specific slowdown in Western Australia, a brick-intensive market, has implications for other building product companies, including Boral ((BLD)), as some 11% of that company's Australian revenue is derived from bricks, construction materials and masonry.

Macquarie suspects the building cycle is running out of momentum and rising energy costs will also present a significant headwind. The broker increases FY18 earnings expectations for building products by 29%, as conditions appear to be relatively solid and there is some pent-up demand following weather-affected deferrals to FY18.

Morgans agrees that while the company has considerable exposure to residential construction, given building activity slowing and higher energy costs, growth over the next few years may be more challenging.

This may be mitigated by the company's investment in WH Soul Pattinson ((SOL)) and increased activity in land & development but, irrespective, the stock is considered fully valued at current levels. Morgans reduces its FY17 operating earnings (EBITDA) forecast by -10% and underlying net profit by -11%.

Meanwhile, the company has sold its former brick-making site at Malaga in Western Australia for $19.2m, consistent with the intended restructure of its WA brick, roof tile and timber operations. The high-cost Malaga plant was closed earlier this year and production has now been transferred to the upgraded Cardup plant.

The consensus target is $14.63, suggesting 9.2% upside to the last share price. There is one Buy rating (Deutsche Bank) and three Hold. Targets range from $13.60 (Morgans) to $15.86 (Deutsche Bank).

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