Brickworks (ASX:BKW) was able to navigate the challenges of COVID-19 and make a bumper profit but the sector isn’t out of the woods just yet.

Last week, the building products maker released its FY21 results and it grew its underlying net profit by 95%.

It has grown off the back of the construction boom – both in respect of its core business and property trust.

A further boost to the company will come from the forthcoming merger of Washington H. Soul Pattinson (ASX:SOL) – which it is a major shareholder of – and Milton (ASX:MLT).

But the sector has been hit with restrictions in NSW and Victoria in the past couple of months, and the possible collapse of property developer Evergrande could send another shockwave through the sector.

And it remains to be seen if the construction boom continues after the current lockdowns when Australia will be living with the virus.

Stockhead caught up with Brickworks managing director Lindsay Partridge about his company’s performance in recent months, what he expects going forward and if he thinks vaccine mandates or Evergrande might affect the company and the industry.

 

You must be happy to achieve the result despite the challenging environment?

“You can be lucky and unlucky in life and we’re lucky in two respects currently,” he said.

“One is that industrial shares are at the epicentre of the new economy. It’s coming faster because of the pandemic.

“The other one is housing – people decide they want to live in houses and the government put stimulus on it.

“So we were pretty lucky on two counts.”

 

Do you think this boom would’ve happened without COVID?

“Some of the things that have changed may not have changed. The move from apartments to houses and from the city to the country may not’ve changed.

“But once people realise a) they didn’t want to be in an apartment locked up but b) they can work from anywhere, then why live in the city or why burden yourself with travel to work every day when you can live and work where you want?”

 

Have the past couple of months been more challenging than other phases of the pandemic with the restrictions on construction? And are you hopeful of the path out of restrictions?

“I think NSW is going to lead it and what we’ll see over the next month, with restrictions coming off all the time, including for us – building sites [are] 100% capacity from Monday [the 27th] – which is great.

“I don’t think Victoria’s too far behind us, they’ll come out of this. Hopefully that’s not too long.

“I’ve just got this feeling NSW and Victoria will join up and then you’ve got this problem of the other states, whose economies are doing very well by the way.

“But they’ve got to make a decision, they’ve got to jump at some point from being locked up to joining the rest of the world and the country.”

 

Might consumer sentiment exiting lockdowns be a challenge given that this time we’ll actually be living with COVID as opposed to without it?

“I think the people will respond over time and return generally back to what we would call normal, other than those changes I’ve already discussed.

“I think there’s a risk about those other states getting out of this, but there’s this other risk about the supply chain and that’s very fragile at the moment.

“We’re looking oxides and cement. We’re worried about cement where 30-40% of Australia’s consumption is imported.

“Not only has the price gone through the roof but we’re worried supply will be a problem. So we’ll have our tanks at 40-50k tonnes as an emergency reserve.

“But a lot of supply has been run down over last 18 months and people haven’t got a normal buffer they once had.

“If there’s any further disruption to container shipping we might find a situation where, it doesn’t matter about the price, all these things are just not available.”

 

How has your North American business compared to Australia exiting lockdowns with the virus?

“They had it the whole time. There was never a period where they didn’t and we just had to handle it from day one.

“A lot of trends we’re seeing here are the same there – people wanting to live in the country – they’re much the same there.

“And a lot of shortages are the same worldwide. There’s shortage of timber in America, there’s also a shortage in Australia; it’s amazingly parallel. I think they’re coming out of it well, NSW vaccination rates are similar to what America is.

“They’re out of it just getting back to life, people going out and the rest of it.

“But there are some problems, the increased costs have made some projects no longer stack up.

“Because of either supply shortages or cost increases, things don’t stack up and they don’t go ahead.

“Housing seems OK, but anything beyond that is basically pretty quiet in a lot of areas.”

 

What have you made of the Evergrande situation?

“It’s interesting, obviously they’ve gone in too hard and grew too fast with too much debt and they’ve built themselves a whole lot of apartments that no one wants to buy anymore.

“It’s a pretty typical boom and bust which I think tends to be controlled better in Australia.

“We learnt from some of our excesses previously and the bankers have a whole list of restrictions to stop the same thing happening here and at the moment we’re not building many apartment towers.

“But I think the issue with homebuilders is a lot of them signed up to stimulus package homes a year ago, they were fixed-priced contracts, and they’ve been delayed due to these issues.

“And now they’re buying supply at prices that have gone up and they’re going to complete these houses in the next 6-12 months at a loss, so I’d be concerned for a lot of small builders.

“I think the big ones are strong, but a lot of smaller ones could struggle through this period and I wouldn’t be surprised if we saw a wave of collapses because of this.”

 

Brickworks have a big stake in fellow ASX listee WHSP. How did that stake come about?

“In 1968, Brickworks was worried about being taken over by London Brick and in those days it wasn’t uncommon for companies to have cross-shareholdings.

“We were both worth about $26-$28 million so we were next to each other on the stock market.

“The two chairmen got together and they decided they’d swap 1 million shares. So that’s how it started and from there on they were buying shares off each other.

“It ended up Soul owning 49% of us and us owning 43% of them; over time it has wound down.

“With Milton [merging with WHSP] we’re down to 26%, but we spent $26 million and we sold $200m worth of shares a few years ago when they went into the MSCI index.

“The balance of holdings is worth $3.5 billion so it’s pretty valuable. They’ve compounded 14-15% per year for something like 50 years.

“And Brickworks has compounded growth 13% per annum 60 years.”

 

What will the deal with Milton do going forward?

“It’s going to give more liquidity, another 30,000 shareholders taking the shareholder base to 60,000.

“It’s going to be good for them, it’s going to give them capacity to take on bigger projects.

“And it means they get into an index on top 50 and it will result – and has resulted already – in more people coming in to buy the stock.”

 

Your Property trust has grown in FY21? Has it simply been sitting back and growing  or have you done individual transactions?

“We have a long development pipeline, we used to do 30-50k square metres, currently 280,000 square metres. We’re building Amazon, Coles, we must have 10 buildings under construction today, those 10 would be worth $1.5 billion.

“And over the next two years our gross rent will increase by $50 million.

“So the development side of it is a very important, building specialised projects for companies that otherwise wouldn’t get their work.

“And some of them… for Amazon is a 20-year lease so when it’s complete it will have lowest cap rate of any in Australia. A 20-year lease with a multi- trillion company is just unheard of.

“We’ve got more land to come into the trust and develop so that’s going to continue on.

“As far as increase in value, we’ve a 4.82% cap rate across the portfolio, there’s been some transactions at 3.5-3.6%.

“I usually say I don’t think it’ll go anymore, I wouldn’t be surprised if it goes up another 25-50 points as at this point in time there seems to be significant demand for this product.”

 

Do you see vaccine mandates as something that might affect the industry and your company?

“We’re following whatever the health guidelines are at the moment.

“We test in any area there’s high amount of COVID. We give everyone a rapid antigen test every day but if they’re fully vaccinated they only have to do it once a week.

“But I hope we’ll get majority of employees vaccinated and won’t need to think about a mandate.

“I’d rather try and encourage employees than be try and be heavy handed; it doesn’t always work out the way you want.”

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