BRC ASIA LIMITED (SGX:BEC)
YONGNAM HOLDINGS LIMITED (SGX:AXB)
BOUSTEAD PROJECTS LIMITED (SGX:AVM)
Construction Sector 2020 Outlook - OVERWEIGHT
Construction Sector - 2019 recap
Singapore’s construction demand remains strong YTD.
- According to Building Construction Authority (BCA), total construction demand in Singapore increased 16.9% y-o-y in 9M19 to S$24.7bn (2018: 23.0% y-o-y). Most sectors recorded growth on a y-o-y basis, except the residential sector (- 6.8% y-o-y) and institutional sector (-7.8% y-o-y).
- Total public sector construction demand rose 18.1% y-o-y in 9M19 to S$13.4bn representing 54% of the total construction demand; led by the industrial segment (+69.5% y-o-y), with the award of Neste’s renewable refinery expansion project, and integrated business park development at Punggol Digital District.
- On the commercial front (+55.1% y-o-y), Guoco Midtown and the mixed commercial development at Central Boulevard were among the bigger projects awarded this year. Contracts awarded for civil engineering sector (+17.9% y-o-y) included infrastructure works for Changi Airport Terminal 5, Jurong Region Line (JRL) MRT line, and Tuas Mega Port.
- On the other hand, the residential segment (both public and private) was slightly weaker in 9M19, with contracts awarded dipping 6.8% y-o-y. On 25 Oct 2019, the Housing & Development Board (HDB) announced that it would launch about 4,500 Build-to-Order (BTO) flats in Nov 2019, indicating that the total BTO supply for 2019 would then be about 14,520 units (below the average number of BTO flats launched between 2015 and 2018 of 16,569 flats per year).
- Singapore Institute of Technology’s new campus at Punggol North and a new healthcare facility at Jalan Bukit Merah were some key institutional projects awarded in 9M19, which saw some moderation (-7.8% y-o-y).
Order book saw strong recovery in 2019.
- Benefiting from the recovery in Singapore’s construction demand, combined order book of the 12 Singapore construction firms we track grew 16.5% y-o-y as of end-Sep 2019. The combined order book in 2019 are at a 5-year high.
Industry remains competitive, although tender price index improved slightly.
- The tender price index by BCA recovered to 99.8 in 3Q19, a slight improvement versus 98.6 in 2018. We think this indicates that competitive pressure for construction project bids has abated slightly. The latest survey by BCA revealed a diverging pattern – large A1 civil engineering contractors remain optimistic on business outlook in 2H19 (in anticipation of the rolling out of major contracts for public infrastructure projects); while building contractors (weighed down by the current slowdown in private residential property market) and smaller scale civil engineering contractors are more cautious.
Construction Sector - 2020 outlook
The government is embarking on the next lap of nation-building.
- We think that infrastructure spending through public projects will help to stimulate Singapore’s economy amidst the global trade uncertainty. BCA estimates public sector construction demand to be in the S$16bn-20bn range for 2020F (2019F: S$16.5bn-19.5bn). This is backed by a pipeline of major infrastructure and industrial projects, including:
- further rollout of Changi Airport Terminal 5 infrastructure works,
- Greater Southern Waterfront rejuvenation, and
- extension of Integrated Resorts.
Outlook will remain stable in 2020
- We think that the outlook for the construction sector will remain stable in 2020, with BCA projecting total construction demand (i.e. the value of construction contracts to be awarded) in 2020F at S$27bn-34bn (2019F: S$27bn-32bn).
- Although the elevated risks of a global recession over the coming quarters and the uncertainty in markets will dampen demand for residential, commercial, industrial and retail space, we believe this could be offset by a stronger infrastructure segment.
Healthy pipeline of public and private sector projects.
- Construction demand is a leading indicator of construction activity. There is a typical time lag of 12-18 months between contracts being awarded and the rollout of projects. With order book of construction players at a 5-year high in 2019, we expect this to translate into stronger topline growth for the industry in FY20F.
Continue to look out for leverage risk in the construction sector.
- Given the prolonged weakness and the ensuing lower profitability in the sector over the past three years, construction players generally have a weaker interest coverage ratio. This increases credit risk, with contractors potentially defaulting on their obligation.
- Although financial conditions of construction firms are expected to improve going forward, supported by a steady pipeline of public and private infrastructure projects, we caution investors to look out for highly-geared companies, as well as companies with high-dependence on a single project.
Construction Sector - Valuations
- Other than BRC Asia (SGX:BEC) which is currently trading at a premium to its historical average P/BV, the other two construction companies under our coverage (Yongnam (SGX:AXB), Boustead Project (SGX:AVM)) are currently trading at -1 s.d. below their historical average. All three construction companies have seen their order book recover to a 5-year high in 2019, and we believe this could translate into earnings recovery and share price re-rating for the companies in FY20F.
Construction Sector - Top picks and least preferred
- Within the construction sector, we believe building materials and equipment companies (with dominant market share position within their value chain, and diversified exposure to both the public and private sector projects) could outperform contractors. Among the contractors, we prefer civil engineering contractors over building contractors, in view of the stronger infrastructure spending in the medium term.
BRC ASIA (SGX:BEC) (Rating: ADD, Target Price: S$1.90) is our top pick in the construction sector.
- We like BRC Asia for its market leadership in Singapore’s reinforced steel industry, earnings visibility riding on the recovery in home market demand, and improving balance sheet strength. We forecast BRC Asia to record 21.8% net profit growth in FY20F, as its NPM further expands to 4.1% (FY19F: 3.5%). Margin expansion is expected to come from
- We also see potentially higher dividend payout for FY9/20F (FY19 dividend yield: 5.2%), given BRC Asia’s strong FCF generation capability.
- See BRC Asia Share Price; BRC Asia Target Price; BRC Asia Analyst Reports; BRC Asia Dividend History; BRC Asia Announcements; BRC Asia Latest News.
YONGNAM HOLDINGS (SGX:AXB) (Rating: ADD, Target Price: S$0.28) is our least preferred pick in the sector.
- Order book remains high at S$371m, and we remain optimistic that Yongnam would capture more strut order wins in FY19/20F, with continued rollout of NSC and Changi T5 projects. With the higher utilisation of strut assets, we expect Yongnam’s losses to narrow further sequentially in the coming quarters, and forecast the company to return to the black in 2H20F. However, the pace of earnings recovery hinges on progress of project execution, which could be subject to delays.
- See Yongnam Share Price; Yongnam Target Price; Yongnam Analyst Reports; Yongnam Dividend History; Yongnam Announcements; Yongnam Latest News.
- While we still expect Yongnam to return to profitability in FY20F, BRC Asia is our preferred pick due to
- its relatively defensive nature with higher dividend yield, and
- stronger earnings visibility.
ONG Khang Chuen CFA
CGS-CIMB Research
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LIM Siew Khee
CGS-CIMB Research
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https://www.cgs-cimb.com
2019-12-09
SGX Stock
Analyst Report
1.900
SAME
1.900
0.28
SAME
0.280
1.24
SAME
1.24
