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

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.

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.

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.

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.

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,
- we downgrade Yongnam (SGX:AXB) from Hold to REDUCE, due to further stress on its near-term cashflow.
- we reiterate ADD on BRC Asia (SGX:BEC) and Boustead Project (SGX:AVM) as we think that their recent share price weakness have more than priced in the Covid-19 disruptions.

We cut our FY20-22F EPS forecasts by 1.6%-19.3%. Despite near-term disruptions, we believe its investment thesis remains intact. We still expect BRC Asia to record a net profit of S$36.3m in FY9/20F (+15% y-o-y) on the back of stronger margins, as the company is benefiting from lower steel prices and stronger procurement power.
Reiterate ADD, with a lower Target Price of S$1.80.
See BRC Asia Share Price; BRC Asia Target Price; BRC Asia Analyst Reports; BRC Asia Dividend History; BRC Asia Announcements; BRC Asia Latest News.

We cut our FY20-22F EPS forecasts by 20.5%-21.8%, mainly due to downward revisions of our order win forecasts. A possible REIT launch in 2020/2021F remains its key catalyst. Boustead Project’s valuation of 0.35x FY20F RNAV is attractive, in our view.
We reiterate our ADD call, with a lower Target Price of S$0.93, based on a conservative 50% discount to our FY20F RNAV estimate of S$1.86 per share.
See Boustead Project Share Price; Boustead Project Target Price; Boustead Project Analyst Reports; Boustead Project Dividend History; Boustead Project Announcements; Boustead Project Latest News.

Factoring in the one-month impact from the stop work order, we lower our FY20F EPS forecast by 82.7% and now expect Yongnam to record a net loss of S$18.3m in FY20F. We are still expecting Yongnam to achieve profitability in FY21F as its strut utilisation rate further improves, allowing it to better absorb overhead costs. We lift FY21/22F EPS by 30.0%/5.6%, due to some spillover progress billings from construction work delays in CY20F.
We downgrade Yongnam from Hold to REDUCE due to the near-term cashflow concerns arising from the one-month stop work order. Our Target Price is consequently lowered to S$0.074, pegged to 0.21x FY20F P/BV (Yongnam’s historical trough).
See Yongnam Share Price; Yongnam Target Price; Yongnam Analyst Reports; Yongnam Dividend History; Yongnam Announcements; Yongnam Latest News.
See also previous report: Yongnam Holdings - CGS-CIMB Research 2020-04-01: Not Out Of The Woods Yet.

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.

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