BRC Asia - UOB Kay Hian 2019-07-31: Good Proxy To Singapore’s Infrastructure & Construction Upcycle

BRC ASIA LIMITED (SGX:BEC) | SGinvestors.io BRC ASIA LIMITED (SGX:BEC)

BRC Asia - Good Proxy To Singapore’s Infrastructure & Construction Upcycle

  • BRC ASIA LIMITED (SGX:BEC) has emerged as the largest supplier of steel products after a recent merger and is reaping synergies in procurement and operations. It is also benefitting from Singapore’s booming infrastructure and construction upcycle, with a healthy orderbook of S$750m.
  • BRC’s recent dividend policy of at least 30% payout, or 5 S cents, demonstrates its commitment to shareholders and robust cash flow.
  • Initiate coverage with a BUY and a target price of S$1.75, based on 11.5x FY20F PE.



INVESTMENT HIGHLIGHTS


Initiate coverage with BUY and PE-based target price of S$1.75,

  • Initiate coverage with BUY and PE-based target price of S$1.75, implying a 28% upside. We value BRC ASIA LIMITED (SGX:BEC) at S$409m, based on 11.5x FY20F PE, pegged to its long-term average mean (excluding outliers; mainly from the high base in FY17-18).
  • We believe that at current price levels, the group is undervalued, trading at 9.0x FY20F PE below its long-term average. BRC is also set to benefit from strong industry trends on the back of an upcycle in infrastructure and construction projects and enhanced scale after its acquisition of Lee Metal Group.

Merger provides monopolistic power, improved earnings and a strong shareholder.

  • BRC acquired its closest rival, Lee Metal Group, in Jul 18, which gave it a 60-70% market share in the supply of steel products. We expect net profit to grow 149% in FY19 and 19% in FY20. Its steel products include steel prefabricated columns, steel meshes and rebars which are used in construction projects that require residential and civil engineering works.
  • Synergies are coming from larger procurement and increased efficiency from the integration of factories and processes. Operating margin rose from 1.7% in 1HFY18 to 3.0% in 1HFY19, while net profit almost tripled y-o-y to S$11.5m in 1HFY19.
  • BRC’s largest shareholder with a 72% stake is a related entity of Rui Gang Lian Group, one of China’s largest iron ore traders and importers.

Beneficiary of Singapore’s infrastructure and construction upcycle.

  • For 2019, the Building & Construction Authority is forecasting construction demand of S$27b-32b, with the public sector expected to continue contributing about 60% of total demand. This is after three consecutive years of decline in 2015-17. The industry also exhibits a counter-cyclical nature, with GDP from the construction sector increasing at a CAGR of 36% in 2007-09.
  • BRC has supplied for iconic projects such as Resorts World Sentosa and Pinnacle@Duxton, and its orderbook currently stands at S$750m. Moving forward, there frastructure projects with several leading indicators pointing to an upturn in the construction industry.

New dividend policy backed by robust cash flow and falling gearing.

  • BRC has recently announced its dividend policy for FY19 and FY20, with a targeted annual dividend payout of not less than 30% of net profit. FY19 will have no less than 5 S cents as final dividend, translating to a yield of 3.6%.
  • Despite the slowdown in the sector in 2017-18, BRC has seen resilient operating cash flow. With the addition of Lee Metal Group, BRC’s cash flow has increased further. Net gearing fell from a high of 1.6x in 1QFY19 to 1.2x in 2QFY19.


VALUATION/RECOMMENDATION


Initiate coverage with a BUY

  • Initiate coverage with a BUY and PE-based target price of S$1.75, based on 11.5x FY20F PE, pegged to its long-term average mean (excluding outliers of > 2SD at 25x). The exclusion is primarily from the high base in FY17-18. The stock is currently trading at 9.0x FY20F PE, still below its long-term average.
  • See attached 17-page PDF report for complete analysis with BRC's business outlook, industry outlook and earnings outlook.
  • We like BRC for its:
    1. enhanced scale and earnings from the Lee Metal Group acquisition;
    2. industry upcycle; and
    3. robust cash flow and reducing gearing.





Lucas Teng UOB Kay Hian Research | Llelleythan Tan UOB Kay Hian | https://research.uobkayhian.com/ 2019-07-31
SGX Stock Analyst Report BUY INITIATE BUY 1.75 SAME 1.75



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