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Brickworks (ASX:BKW) share price on watch amid 269% first half profit jump

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The Brickworks Limited (ASX: BKW) share price will be on watch this morning.

This follows the release of the building products company’s half year results.

Brickworks share price on watch amid strong profit growth

Revenue up 24% to $535 million Underlying earnings before interest and tax (EBIT) up 254% to $450 million Underlying net profit after tax up 269% to $330 million Fully franked interim dividend up 5% to 22 cents per share

What happened during the first half?

For the six months ended 31 January, Brickworks reported a 24% increase in revenue to $535 million and a 254% jump in underlying EBIT to $450 million. The latter compares to Citi’s estimate of $321 million, which could bode well for the Brickworks share price today.

The company’s top line result was driven by a 6% increase in Building Products Australia revenue to $330 million and an 84% lift in Building Products North America revenue to $187 million. The latter reflects the acquisition of IBC in August 2021.

Whereas its earnings growth was driven largely by investment earnings of $73 million and a $349 million increase in the value of its share of its joint venture property trust with Goodman Group (ASX: GMG) to $1,260 million. This was supported by a 66% increase in Building Products earnings to a more modest $27 million.

In light of the source of its earnings growth, Brickworks has only increased its fully franked interim dividend by a single cent or 5% to 22 cents per share.

Management commentary

Brickworks’ Managing Director, Mr. Lindsay Partridge, was very pleased with the performance of its property trust.

He said: “We have seen strong demand and sustained growth in the value of our Property Trust over a number of years. The pandemic has only fuelled this growth, by accelerating industry trends towards online shopping and increasing the importance of well-located distribution hubs and sophisticated supply chain solutions. These trends are reflected in our independent revaluation process, that has resulted in average capitalisation rate compression of 50 basis points to 3.6%, across the leased assets within the Property Trust.”

Looking ahead, Mr Partridge appears optimistic on the company’s future but warned of potential challenges.

He commented: “Brickworks is in a strong position, with a diversified portfolio of attractive assets. The increasing scale of our operations means we are on track to record over $1 billion in annual Group revenue, for the first time.”

“Of course, the outbreak of war in Ukraine has created increased uncertainty that has the potential to significantly impact all of our businesses in a variety of ways. These impacts may include the price and availability of energy, upward pressure on inflation and interest rates and a decline in consumer confidence. Further strain on international supply chains is already evident, with shipping rates increasing back to levels not seen since the worst of the pandemic,” Partridge added.

New operational property trust

In light of the overwhelming success of its joint venture with Goodman, the two parties are intending to launch a new operational property trust.

The release advises that Brickworks has been exploring opportunities to realise value from its portfolio of operational land and is now in advanced discussions in relation to a potential transaction that would include the launch of a new joint venture property trust in partnership with Goodman, comprising a portfolio of properties tenanted by Brickworks’ building products business.

An initial portfolio of 15 building products’ properties, with a total gross value of around $415 million, has been identified for inclusion in the first stage of the jointly owned operational property trust. The sale and lease back of these manufacturing sites will deliver gross cash proceeds of around $200 million and an estimated pre-tax profit of $260 million to $280 million.

Mr Partridge said: “The partial sale of a selection of our manufacturing sites will enable Brickworks to secure cash proceeds and recognise profit from the significant underlying land value of these sites. Over the longer term, the partnership with Goodman will support further value creation, with some properties having the potential for development and greater utilisation.”

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