Construction & Material Sector - CGS-CIMB Research 2020-04-13: Feeling The COVID-19 Pinch

Construction & Material Sector - CGS-CIMB Research | SGinvestors.io BRC ASIA LIMITED (SGX:BEC) YONGNAM HOLDINGS LIMITED (SGX:AXB) BOUSTEAD PROJECTS LIMITED (SGX:AVM)

Construction & Material Sector - Feeling The COVID-19 Pinch

  • Construction progress could be further impacted by one-month circuit breaker measure and rising infections at foreign worker dormitories, in our view.
  • Firms could potentially make up for the slack in late-2020, but project delays likely to further tighten cash flow and lead to elevated credit risk in the sector.
  • Reiterate sector Neutral.
  • We reiterate ADD on BRC Asia (SGX:BEC) and Boustead Project (SGX:AVM), but downgrade Yongnam (SGX:AXB) from Hold to REDUCE.



One month stop-work order on construction sites

  • Construction works in Singapore are halted from 7 Apr to 4 May, in line with the circuit breaker measure announced by the Singapore government to mitigate the spread of Covid-19. Rising infections at foreign worker dormitories could potentially exacerbate the shortage in manpower for the construction industry post-circuit breaker, in our view.


Deteriorating outlook despite government support measures

  • With the stop-work order, we can expect minimal progress billings for the month of Apr. While there is some room for the construction sector to catch up on the slack in 2H20F, as the situation improves, we can expect the industry’s construction output in 2020F to be further impacted by the circuit breaker measure.
  • 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 significant earnings impact for 2Q20F from the circuit breaker, given the construction companies’ large fixed cost base.
  • Cashflow will be further tightened, elevating credit risk in the sector, in our view.


Look out for credit 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. We noticed that the net gearing of construction companies in Singapore has trended up in recent quarters.
  • The recent Covid-19 outbreak could potentially further tighten cashflow for construction companies, should their pace of construction activity slow down significantly due to labour shortage or supply chain disruptions. This increases credit risks, with contractors potentially defaulting on their obligations.
  • Although financial conditions of construction firms are expected to improve post-Covid-19, supported by higher progress payments, we caution investors to look out for highly-geared companies, as well as companies with high-dependence on a single project.
  • To help ease contractors’ potential cashflow concerns that could arise due to the Covid-19 outbreak, BCA announced that Government Procuring Entities (GPEs) will be accepting fortnightly payment claims, in lieu of monthly payment claims, for their public sector construction projects. Contractors could also submit claims for extension of time (EOT) under the contract provisions, should they assess that work progress has been delayed due to impact from the Covid-19 outbreak, after having taken all necessary mitigating measures.


Recommendations

  • In view of the circuit breaker measure, we bake in lower CY20F progress billings forecast for construction companies under our coverage. We also lower our order win forecasts in view of the macro uncertainties. With this,

BRC Asia (SGX:BEC):


Boustead Project (SGX:AVM):


Yongnam (SGX:AXB):



Reiterate sector NEUTRAL

  • Singapore-listed construction companies’ order books are at a 5-year high, but we reiterate NEUTRAL on the construction sector due to near-term progress disruptions and elevated credit risks.
  • BRC Asia (SGX:BEC) is still our sector top pick due to its dominant market share position in the reinforced steel industry, which makes it a good proxy to the construction sector recovery in the medium term.
  • Key downside risks for the sector in 2020 include:
    1. cash flow/counterparty credit risks, and
    2. further construction work delays.
  • Upside risks include:
    1. stronger-than-expected public sector construction demand as the government announces more projects to boost the economy, or
    2. earlier-than-expected awarding of construction contracts related to the expansion of the integrated resorts.

See attached PDF report for complete analysis.






ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-13
SGX Stock Analyst Report ADD MAINTAIN ADD 1.80 DOWN 2.050
REDUCE DOWNGRADE HOLD 0.074 DOWN 0.090
ADD MAINTAIN ADD 0.93 DOWN 1.240



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