BRC Asia - CGS-CIMB Research 2020-03-03: Steel Looking Good


BRC Asia - Steel Looking Good

  • BRC Asia posted a strong 1QFY20 core net profit of S$11.9m (+93% y-o-y). Results were above our forecasts due to stronger-than-expected GPM.
  • We remain positive on BRC Asia’s FY20F outlook, albeit with some near-term headwinds from the Covid-19 outbreak.
  • Reiterate ADD, with an unchanged Target Price of S$2.05.
  • BRC Asia remains our top pick for the construction industry.

Strong 1QFY9/20 results

  • BRC Asia (SGX:BEC) reported a stellar 1Q20 core net profit of S$11.9m (+93% y-o-y), forming 26%/29% of our/Bloomberg consensus’ full-year projection. This is despite 1H being a slower period seasonally for the group, due to festive seasons, including Christmas and Chinese New Year.
  • The results beat came mainly from stronger GPM, which expanded by 6.1% pts y-o-y to 13.1% in 1Q20. We believe this was contributed by:
    1. stronger procurement power, and
    2. lower steel rebar prices.

Temporary Covid-19 impact; investment thesis remains intact

  • Management has seen volume deliveries drop by 5-10% in Feb due to the Covid-19 outbreak, as construction activities in Singapore were temporarily impacted by the staggered return of Chinese workers (which make up c.10% of the construction workforce).
  • Nevertheless, management remains cautiously optimistic on its FY20F outlook, as it expects construction companies to catch up on the slack later as the situation improves.
  • We believe our FY20F volume growth forecast of 8% for BRC Asia remains intact, given that it is at the lower end of the Building and Construction Authority’s forecasted 7-21% y-o-y growth for steel bar demand in 2020F.

Strong margin expansion to continue in FY20F

  • We forecast BRC Asia to record a GPM expansion of 1.9% pts to 10.3% in FY20F. BRC Asia has been entering into more fixed price contracts with construction companies, in view of the weaker steel price outlook.
  • According to BCA, steel rebar prices in Singapore have been on a downtrend since May 2019 (Jan 2020: -4.2% y-o-y); this could potentially translate into better profits for BRC Asia.
  • We also expect BRC Asia to benefit from:
    1. normalised industry pricing,
    2. the whittling down of low-margin projects from BRC Asia’s orderbook, and
    3. further cost synergies from BRC Asia’s consolidation of Lee Metal in FY20F.
  • Overall, we expect BRC Asia to record a net profit of S$45m in FY20F (+43% y-o-y).

Reiterate ADD, with Target Price of S$2.05

ONG Khang Chuen CFA CGS-CIMB Research | Caleb PANG Huan Zhong CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-03
SGX Stock Analyst Report ADD MAINTAIN ADD 2.050 SAME 2.050