BRC Asia - CGS-CIMB Research 2020-05-14: Bent But Not Broken


BRC Asia - Bent But Not Broken

  • BRC Asia reported solid 2QFY9/20 core net profit (+122% y-o-y) on the back of strong margin expansion.
  • We expect temporary disruption due to government measures to mitigate the spread of Covid-19, and lower our FY20F EPS by 34.9% accordingly.
  • Reiterate ADD. BRC Asia’s leadership position in the reinforced steel industry makes it a good proxy for a construction sector recovery in the medium term.

Solid 2QFY9/20F results.

  • BRC Asia (SGX:BEC)'s 2QFY19 core net profit rose 122% y-o-y to S$11.9m during the quarter, mainly due to strong margin expansion. GPM expanded by 4.9% pts y-o-y to 10.9% as BRC Asia continues to benefit from
    1. normalised pricing competition within the steel rebar industry in Singapore and
    2. stronger procurement power post its acquisition of Lee Metal.
  • BRC Asia's 1HFY20 core net profit came in at 66%/68% of our/Bloomberg consensus FY20F.

To take a hit from circuit breaker measures in 3QFY20.

  • Construction works in Singapore are halted for two months (7 Apr to 1 Jun), due to circuit breaker (CB) measures announced by the government to mitigate the spread of Covid-19. With the stop work order, we expect minimal industry construction progress, which will negatively impact demand for steel rebars.
  • Some main contractors have signalled their intention to accelerate works after the CB is lifted, but we think this is more probable only in 4QFY20, given labour constraints and new conditions for working in the post-CB era.
  • We expect a staggered return to normalcy post-CB, and pencil in a net loss of S$10m for 3Q20 before returning to profitability in 4Q20. Our FY20-22F EPS forecasts are lowered by 0.9%-34.9% accordingly.

Heightened emphasis to safeguard against receivables risk.

  • BRC Asia has recorded an increase in allowance for expected credit losses of S$4.9m in 2Q20, as it expects higher credit risk going forward with some customers more adversely impacted by CB measures. Management is carefully monitoring the situation, and will cease supply of materials to customers at risk of default.
  • BRC Asia also has trade credit insurance in place against c.70% of its receivables to safeguard itself against such risk.

Reiterate ADD, with a lower Target Price of S$1.55.

  • Reiterate ADD. Despite the near-term disruptions, we continue to like BRC Asia for its dominant market share position in the reinforced steel industry, which makes it a good proxy for a construction sector recovery in the medium term.
  • BRC Asia’s orderbook, which contains a large proportion of government projects, remained strong at S$980m as at end-2Q20 (end-1Q20: S$900m). With our EPS cuts, our Target Price is lowered to S$1.55, based on 1.35x CY20F BVPS (GGM: ROE 11.9%, 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.
  • Downside risks include counterparty credit risk and stricter government regulations which could further slow down construction activities in CY20.

ONG Khang Chuen CFA CGS-CIMB Research | Caleb PANG Huan Zhong CGS-CIMB Research | 2020-05-14
SGX Stock Analyst Report ADD MAINTAIN ADD 1.55 DOWN 1.800