Brickworks Ltd is anticipating that 2009 will be another tough year.
After battling to produce a sound result for 2008, with lower results from its Building Products and Land and Development businesses the drivers of the downturn, the company is expecting another 12 months of activity at similar tough levels.
In that respect the company is the perfect metaphor for the health of the Australian home building sector, from private houses, to home units and flats.
Commencements are forecast to be down, there are already signs of that happening in the early months of 2008-09, and it’s going to get tougher before it gets better.
Interest rates have started falling, but the company doesn’t see much benefit from that as yet.
Pent up demand, especially in NSW, isn’t being met and downturns have happened in two previously strong states, Queensland and NSW.
The company, which is part of the Washington H. Soul Pattinson group (which includes New Hope Collieries), is the country’s major manufacturer of bricks and tiles and its fortunes are linked to those of home building.
And home building has been stagnant in the past year or so, and 2009 is shaping up as not much better with figures out yesterday from the Housing Industry Association showing a downturn in new houses, but a rare rise in multi-dwelling units built in August.
While the company will get a big cash benefit from its share of the New Hope sale of a Queensland coal mine site and a forthcoming special dividend, the underlying results will be influenced by the tougher times for its two main businesses, building products and property development.
Earnings for the year to July dipped 5.6% to $101.478 million, down from $107.533 million in 2007, the company reported yesterday.
‘Normalised’ profit before "non-regular items" rose 5.9% to $108.2 million after revenue fell 0.8% to $553.716 million on the back of lower sales by the brick-making and tile division.
Earnings before interest and tax (EBIT) were boosted by a sharp rise in profits from land development: up from $60.3 million to $93.7 million; this more than offset am 18.7% drop in EBIT from the building products business to $65.9 million from $53.6 million.
Final dividend was lifted to 26.5c from 26c, making a slightly higher full year payout of 39c a share (38c in 2007).
The reason for that prudent approach to dividends can be seen in the commentary for the outlook: no improvement for building products until next year "some time".
"The impact on housing commencements from the interest rate rises during the past year is now being seen. Brickworks expect that the current half year sales and profits will continue to be adversely affected in this tougher environment, with no improvement expected until some time in 2009.
"Very tight rental markets and record immigration levels continue to drive pent up levels of demand for housing, particularly in New South Wales.
"While lower interest rates will improve housing affordability, lower rates alone are not sufficient. Positive government policies and actions are required to encourage investment and drive the recovery of the housing market.
"Forecasts for the coming year are for a decrease in overall commencements. Victoria, South Australia and Tasmania are expected to remain solid, with New South Wales and Western Australia stabilising and Queensland weaker.
"Several manufacturing sites are scheduled to have extended shutdowns during the current half to reduce stock holdings and balance output with lower sales volumes. Many of our east coast manufacturing sites have also recently been impacted by industrial action.
"A program is in place to ensure the significant input cost increases impacting the company are passed on to the market in order to maintain selling margins.
"The strength and timing of any recovery in overall trading conditions will determine the level of profitability of the Building Products business in the coming year."
The company shut down two brick-making kilns in Sydney earlier in the year and laid off 56 staff. The kilns remain in full working order and can be brought back on stream when demand improves, but that isn’t expected to happen quickly.
The company said that while 2008 commencements in the year to June were higher, the growth in the market during the past year was in the higher density dwelling sector, with an increase of 9.0%.
The new housing sector increased by only 0.5% during the year.
New South Wales saw just 30,756 dwellings commenced during the year to 30 June 2008, an improvement of 3.1% on the year to 30 June 2007. However the improvement was in the higher density dwellings sector, with new housing actually decreasing 0.7% during the past year.
Investors left the New South Wales market following the introduction of the Vendor Tax in 2004. Positive government policy is now required to attract these investors back to New South Wales to alleviate the fundamental shortage of housing construction.
Queensland commencements increased by 6.5% for the year to 30 June 2008 to 43,805 dwellings; however the strength of this market was in the first half of the financial year with activity in the second half falling away dramatically.
Victorian overall commencements were up 8.2% to 41,806 dwellings. The new houses sector was up 4.4% during the year but the real strength was in the higher density dwelling sector, increasing by 22.3% to 10,411 commencements.
Western Australian commencements again declined with a fall of another 9.9% to 22,361 dwellings. However more importantly for Brickworks was the 15.5% decline in the number o
