BRC Asia - CGS-CIMB Research 2020-04-13: Bent But Not Broken

BRC ASIA LIMITED (SGX:BEC)

BRC Asia - Bent But Not Broken

Construction works in Singapore are halted for a month under the circuit breaker measure announced by the government.
We cut our FY20-22F EPS by 1.6-19.3% to account for the stop-work order. We remain positive on the FY20F outlook despite near term headwinds.
Reiterate ADD with a lower P/BV-derived Target Price of S$1.80.
BRC Asia (SGX:BEC) remains our top pick for the construction industry.

Construction works in Singapore are halted for a month (7 Apr to 4 May), in line with the circuit breaker measure announced by Singapore government to mitigate the spread of Covid-19.
Based on our latest channel checks, we understand that most industry players are complying with the stop-work order, and this applies to the entire supply chain.

With the stop-work order, we can expect minimal industry progress billings in Apr, which could negatively impact the demand for steel rebars. While there is some room for the construction sector to catch up on the slack in 2H20F as the situation improves, we lower our revenue growth forecast for BRC Asia to S$896.3m (-1.9% y-o-y) to account for lower volume growth.
The new policies rolled out by the government could help offset some labour costs and relieve concerns over the timely fulfilment of contractual obligations but we still see negative earnings impact from the circuit breaker, given construction companies’ large fixed cost base. Hence, we cut our FY20-22F EPS by 1.6%-19.3%.

Despite the near-term disruptions, we forecast BRC Asia recording a GPM expansion of 1.3% pts to 9.7% 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 (Feb 2020: -5.0% y-o-y); this could potentially translate to 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.
After our EPS cuts, we still expect BRC Asia to record a net profit of S$36.3m in FY20F (+15% y-o-y). However, we do caution investors to look out for higher credit risk in the sector as construction companies’ cash flows will be further tightened; this could potentially increase bad debt provisions by BRC Asia in FY20F.

Reiterate ADD. With our EPS cuts, we lower our Target Price to S$1.80, based on 1.53x CY20F BVPS (GGM: ROE 13.3%, cost of equity 8.9%, terminal growth 0.5%).
See BRC Asia Share Price; BRC Asia Target Price; BRC Asia Analyst Reports; BRC Asia Dividend History; BRC Asia Announcements; BRC Asia Latest News.
Re-rating catalysts include stronger margin expansion; downside risks include slower volume growth due to weaker construction activities amid the Covid-19 outbreak and counterparty credit risks.
Read also sector report: Construction & Material Sector - CGS-CIMB 2020-04-13: Feeling The COVID-19 Pinch.

ONG Khang Chuen CFA CGS-CIMB Research | Caleb PANG Huan Zhong CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-13

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