BRC Asia - UOB Kay Hian 2019-11-26: FY19 Building On A Resilient Foundation

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

BRC Asia - FY19 Building On A Resilient Foundation

  • BRC Asia reported FY19 net profit of S$31.6m (+162% y-o-y), beating our expectations at 105% of our forecast. The group declared a dividend of 8 S cents (3 S cents special dividend).
  • Given the strong earnings visbiliity, a similar DPS in FY20 would provide an attractive yield of 5.4%. Further upside may come from a stronger public housing segment.
  • Maintain BUY and target price of S$1.75.



BRC ASIA FY19 RESULTS


4QFY19 net profit of S$10.9m, beating estimates.


Positive dividend surprise.

  • BRC Asia announced a final dividend of 8 S cents (3 S cents in special dividend), compared to the minimum expectation of 5 S cents. The group paid 1 S cent in FY18. Excluding the special dividend, this represents a payout ratio of 36% of net profit (59% payout including special dividend). See BRC Asia Dividend History.
  • To recap, the group has previously committed to a minimum of 30% dividend payout for FY20.

Operating margins on the recovery.

  • For 4QFY19, operating margin was 6.1% (+0.7ppt q-o-q) on a trajectory of recovery since the start of the year. BRC Asia continues to benefit from better margins and cost synergies from bulk raw material purchases after its acquisition of Lee Metal in 2018.
  • Administrative expense was down 3% y-o-y in FY19 due to one-off legal and professional fees incurred in FY18. However, finance costs rose due to increased raw material purchases to meet higher sales volume for the enlarged group.

Strong balance sheet and cash flow.

  • Net asset value was S$262.9m as at end-FY19, with operating cash flow before working capital more than doubled to S$58.4m. The group continued to pare down debt, with net gearing at 100% in FY19 (FY18: 125%).

Orderbook healthy.

  • BRC Asia’s orderbook at end-4QFY19 stood at about S$950m with projects lasting up to five years.


ESSENTIALS


Strong pipeline in an industry upcycle.

  • There is a healthy pipeline for both public and private sector projects, particularly in public infrastructure construction, which include the Punggol Digital District, PUB's Tuas Water Reclamation Plant for the Deep Tunnel Sewerage System Phase 2, the North-South Corridor and the Thomson-East Coast Line.
  • Steel demand is up in 2019, in line with higher construction contracts awarded. According to the Ministry of Trade and Industry’s advanced estimates, the construction sector GDP grew 2.7% y-o-y in 3Q19, and management also noted an uptick in the hospitality sector. This comes on the back of subdued construction activities in recent years.
  • In our view, BRC Asia commands a sizeable share of the market and offers a good proxy to ride the industry upcycle.

Public housing projects still flat; any boost will likely provide further upside.

  • The pipeline for new public housing projects remains modest. With about 4,500 Build-To-Order (BTO) units launched in Nov 19, this brings the total BTO supply to about 14,500 units for the year. This is still below the average of about 16,600 units launched in 2015-18 and the average of 25,000 in 2010-14.
  • We note the recent grant improvements through the Enhanced CPF Housing Grant announced by the Ministry of Development, which enhances housing grants and raise the income ceilings for first-time flat buyers. Given that value-add steel products are utilised in public housing projects, we think any volume increases in BTO projects will provide further upside for BRC Asia, although management noted there are other mitigating factors, such as overseas offsite prefabricated prefinished volumetric construction (PPVC) which may compete for demand.

Healthy dividends.

  • Given a healthy pipeline of projects, we think earnings visibility is strong for the group and it would be able to capitalise on improved margins from larger scale of operations post-merger with Lee Metal.
  • If the group were to maintain a similar DPS of 8 S Cents in FY20, this provides an attractive yield of 5.4%.


EARNINGS REVISION/RISK


Maintain earnings forecasts.

  • We are projecting net profits of S$35.6m (+13% y-o-y) for FY20, S$37.6m (+6% y-o-y) for FY21 and S$39.9m (+6% y-o-y) for FY22.


VALUATION/RECOMMENDATION

  • Maintain BUY and 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 9.8x FY20F PE, still below its long-term average. See BRC Asia Share Price; BRC Asia Target Price.
  • We like BRC Asia for its:
    • enhanced scale and earnings after acquiring Lee Metal;
    • industry upcycle; and
    • robust cash flow and reduced gearing. The company remains on track to grow its earnings in FY20.


SHARE PRICE CATALYST

  • Strong earnings on the back of synergies after acquiring Lee Metal.
  • More public housing projects.
  • Divestment of non-core assets.





Lucas Teng UOB Kay Hian Research | Llelleythan Tan UOB Kay Hian | https://research.uobkayhian.com/ 2019-11-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.750 SAME 1.750



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