HOLD Brickworks (BKW)

Making bricks is capital intensive, highly cyclical and chronically competitive. Margins are thin and returns are low. Why, then, has Brickworks graced our “buy” list on several occasions?

The secret to its success is that it isn’t only a brickmaker. Most of its value is made up from its 39.4% stake in Soul Pattinson and from a growing property portfolio that produces stable rental income and adds some development potential.

The largest source of income is its 50% stake in a property trust that utilises exhausted brick pits to develop industrial property in a joint venture with Goodman Group.

Which brings us to the weakest part of the business: bricks. This has, in recent history, been a small, esoteric part of the business that was well managed and modestly profitable.

The business has already made a serious acquisition in the US with Glen-Gery, the country’s fourth largest brickmaker, and has plans for further US expansion.

Brickworks has benefited from superb management, perfect cyclical conditions and a consolidated industry in Australia. The risk here is not of a blow-up or a humiliating retreat; it’s that a business we have owned and admired for years, precisely because it doesn’t fit the norms of its industry, slowly starts to morph into a conventional brick business.

For the moment, though, even with acquisitions, building products represent less than a quarter of the firm’s asset base. It is still small enough. If there is one management team in the industry that has earned licence, it is this one. For now, we’re happy to watch and HOLD.