BRC Asia - UOB Kay Hian 2020-08-14: Awaiting A Better Outlook To Build Upon. Downgrade To HOLD

BRC ASIA LIMITED (SGX:BEC)

BRC Asia - Awaiting A Better Outlook To Build Upon. Downgrade To HOLD

BRC Asia’s 3QFY20 net loss of S$2.5m did not come as a surprise, given the curb to construction works. Credit risk remains as the fulfilment of certain pre-COVID contracts could become unprofitable, given heightened costs and lower efficiencies associated with current construction work.
While there have been positive developments, we await better visibility on the rate of recovery as well as a better pickup in new project tenders.
Downgrade BRC Asia to HOLD with a lower PE-based target price of S$1.18.

BRC Asia (SGX:BEC) reported 3QFY20 net loss of S$2.5m, in line with expectations, with 9MFY20 earnings of S$20.1m forming 86% of our full-year estimates.

Revenue slowed considerably in the quarter due to compulsory curtailment of manufacturing and construction activities during the circuit breaker period.

Gross margins fell to a negative position, due to the continuance of fixed and direct costs in light of the dip in construction activities. However, distribution and administrative expenses decreased by 24% and 34% respectively in 3Q20.
BRC Asia recorded a net reversal of allowance for impairment loss of S$5.1m in 3QFY20 mainly due to significantly lower trade receivables, though this is unlikely to be sustained given the low level of construction activities. The group has showed good collection of receivables in the quarter, although it continues to highlight higher credit risks in the industry.

BRC Asia noted a pick-up of activities in the construction sector since the third week of July 20. For BRC Asia, most of its workers have also been cleared to start work from early-July 20, while a majority of foreign workers (4in5) have been cleared to resume work as of 11 August, according to the Ministry of Manpower, albeit with safe distancing measures.
BRC Asia’s orderbook is steady at S$934m (2QFY20: S$980).

BRC Asia expects work productivity at large to decline significantly, with subdued economic activities, as long as a more permanent solution is not found for COVID-19.
For the construction sector, this comes in the form of awaiting swab test results, lower efficiency from safe distancing measures, as well as heightened costs in general. While there is an improvement in the level of construction activities, it is still currently operating only at an estimated 20-25% of pre-COVID levels. Management noted that the rate of recovery remains unclear in the interim.

We noted some positive developments from the recent launch of Build to Order (BTO) projects numbering approximately 7.800 new flats in 8 estates. However, weakness in new projects largely remains as construction for mega projects such as Changi Airport Terminal Five has been delayed.
Management noted that tenders still have been markedly lower compared to last year’s tenders. According to the Building Construction Authority (BCA), 1H20 contracts awarded for construction amounts to approximately S$12.1b, at between 37-43% of initial full year forecasts of between S$28b-33b.

Conservatively, we factor in weaker rate of recovery in construction activities in 4QFY20 through to 2QFY21, assuming that construction activities are operating at approximately 80% of pre-COVID levels by the end of the period. We also assume further weakness in new project construction, affecting FY22 earnings.

Downgrade BRC Asia to HOLD with a lower target price of S$1.18, based on 11.5x FY21F PE. This is pegged to its long-term average mean (excluding outliers of > 2SD at 25x). The exclusion is primarily from the high base in FY17-18.
We await better visibility on rate of recovery in construction activities as well as a better pickup in new project tenders.
Entry price: S$1.05.
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Lucas Teng UOB Kay Hian Research | Llelleythan Tan UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-14

SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.18 DOWN 1.520