BRC ASIA LIMITED (SGX:BEC)
BRC Asia - Approaching The End Of The Tunnel
- Impacted by the industry-wide stop work order, BRC Asia recorded a core net loss of S$6.4m in 3QFY20 (April 2020 to June 2020). Yet, the loss was narrower than our expectations.
- Construction activities set to improve from Aug onwards as government targets to clear migrant worker dorms of COVID-19.
- BRC Asia’s leadership position in the reinforced steel industry makes it a good proxy for a construction sector recovery in the medium term.
BRC Asia's 3QFY20 impacted by industry-wide stop work order
- BRC Asia (SGX:BEC)’s core net loss of S$6.4m in 3Q20 was narrower than our forecast of S$10m loss, mainly due to strong cost control. Topline declined 83% y-o-y during the quarter, due to industry-wide stop work order during the circuit breaker (7 Apr to 1 Jun), followed by a gradual resumption to work given the government’s prudent stance to ensure a safe restart.
- The lower revenue was insufficient to cover continuing expenses, which resulted in the net loss position during the quarter.
Gradual resumption of work
- Despite the better-than-expected 3Q, we lower our FY20F EPS forecast by 32.4%. This is due to the slower resumption of construction activity post circuit-breaker (CB); hence we now project BRC Asia to remain loss-making in 4QFY20.
- We understand that construction activities remained low in Jul, but are set to improve from Aug onwards as the government expects all migrant worker dormitories to be cleared of COVID-19 by the first week of Aug. Nevertheless, given labour constraints and new conditions for working in the post-CB era, we believe construction activities will enter a “new normal” of lower productivity, until a vaccine is widely available. We think it will take some time for construction activities to return to pre-Covid levels.
- Despite construction companies’ order books currently still at high levels, we lower our FY21-22F EPS forecasts by 3.6-8.5%.
Good receivables collection in 3Q, but credit risk still remains
- Trade receivables declined to S$49.6m (-72% q-o-q), showing good collection in 3Q as BRC Asia emphasised safeguarding itself against receivables risk. BRC Asia is still carefully monitoring the situation, and will cease supply of materials to customers at risk of default.
- We understand that BRC Asia has trade credit insurance in place against c.70% of its receivables.
Maintain ADD with lower Target Price of S$1.35
- Maintain 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 order book, which contains a large proportion of government projects, remained strong at S$934m as at end-3Q20 (end- 2Q20: S$980m).
- With our EPS cuts, our BRC Asia's target price is lowered to S$1.35, 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 resumption of construction activities in CY20.
ONG Khang Chuen CFA
CGS-CIMB Research
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Caleb PANG Huan Zhong
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-08-06
SGX Stock
Analyst Report
1.35
DOWN
1.550
