Brickworks Limited shares dropped over 3% to AU$25.26 on Thursday following a massive AU$172.4 million impairment hit for fiscal year 2024. The company’s asset values took a significant blow due to a worsening market environment in Australia and North America, leading to a decline in investor confidence.

AU$172 million impairment triggers investor concerns

Brickworks Limited, Australia’s largest brickmaker, announced a pre-tax impairment of AU$172.4 million, translating to AU$123.5 million after-tax. The impairment includes AU$78.1 million from its Austral Masonry unit and AU$94.3 million from Brickworks North America. This impairment represents a reassessment of the carrying values of its assets as of 31 July 2024 rather than a direct loss in cash flow or profitability.

Market analysts suggest that these impairments reflect deeper problems in the construction sector and declining demand for building materials. Brickworks’ decision to adjust its asset values is a move to align its financial statements with current market realities.

Sharp downturn in building activity

A deteriorating construction market has been cited as the primary cause of the impairment. In Australia, Brickworks noted a substantial drop in multi-residential building activity during the second half of fiscal year 2024. The June 2024 commencements were the lowest in more than a decade, with key markets such as Sydney and Brisbane experiencing a sharp decline in demand for multi-story high-rise developments. This has resulted in lower production output and delayed benefits from recent investments in Austral Masonry. The company also faces rising costs that have not been fully offset by price increases.

In North America, Brickworks reported significantly reduced activity in non-residential building segments, especially in the Northeast and Midwest regions. This has led to the closure of some plants and scaling back of production output. Increased competition in the single-family housing market has also caused “price and volume pressure,” further impacting Brickworks’ operations.

Is the slump an investment opportunity?

Some financial experts believe that the current dip in Brickworks Limited’s share price might present a cyclical opportunity for long-term investors. While the construction industry is facing a downturn, the growing population in both Australia and the United States suggests that demand could rebound once economic conditions, such as interest rates, stabilize. Brickworks’ diversified asset base, including substantial investments in property, provides a potential upside for investors looking to capitalize on a market recovery.

Analysts see Brickworks as a solid pick for long-term value investors, given its extensive and diverse portfolio. They argue that, while the current headwinds may be tough, the company’s positioning allows it to recover strongly once the market normalizes.

Expert opinion: wait or buy?

Financial analysts suggest that while the current market conditions are challenging for Brickworks, the company’s diversified approach provides a cushion against future volatility. The advise is that potential investors should keep a close watch on macroeconomic indicators like interest rates and building activity, as these will be pivotal in determining when to invest. The current price drop can be seen as an entry point but cautions against expecting immediate returns.

Brickworks Limited is navigating through a tough market environment, with substantial impairments reflecting broader challenges in the construction and building sectors. While this may signal short-term pain for investors, the company’s diverse asset base could offer a foundation for future growth when market conditions improve.

  Austral Masonry, Australia, Brickworks Limited, Brickworks North America, Brisbane, Midwest, Northeast, Sydney