BRC Asia - CGS-CIMB Research 2020-12-02: Out Of The Woods


BRC Asia - Out Of The Woods

  • BRC Asia posted a core net profit of S$7m in 4QFY20, which was above expectations as we previously expected losses in 4Q.
  • Construction activities have returned to c.70% of pre-COVID-19 level. We see strong recovery in FY21F, with its healthy order book and stronger margins. Its leadership position in the reinforced steel industry makes it a good proxy to the construction sector recovery.
  • Reiterate ADD on BRC Asia with a higher target price of S$1.90.

BRC Asia's 4QFY20 profit surprise on higher gross profit margin

  • With the progressive resumption of construction works in Singapore, BRC Asia (SGX:BEC) posted a core net profit of S$7m in 4QFY20 (Jul 2020 to Sep 2020) (-36% y-o-y), which was above expectations as we previously forecasted a loss-making quarter.
  • Key surprise was a stronger-than-expected gross profit margin, as BRC Asia enjoyed lower costs in its bulk raw material purchases post its acquisition of Lee Metal.
  • A final dividend of 6 cents was declared, representing dividend payout ratio of 70%. See BRC Asia's dividend history.

Entering a new normal until vaccines are widely available

  • As construction works gradually restarted, BRC Asia was able to return to breakeven levels by the second half of Aug 20.
  • Currently, we estimate that its project run-rate has returned to c.70% of pre-COVID-19 levels. With lower worker availability and the safe distancing measures in place, we expect a new normal in the near future, with construction activities capped at c.80% of pre-COVID-19 levels till vaccines are widely available.

Nevertheless, we expect a strong recovery in FY21F

  • Recall that CY20 was supposed to be a good year for BRC Asia as construction companies entered the year with strong order books, and the Building and Construction Authority (BCA) projected construction output in Singapore to grow 7%-14% y-o-y in 2020.
  • While COVID-19 effectively halted construction works in Singapore for four months this year, the projects were merely delayed — hence we expect healthy levels of construction activity to be sustained into 2021F.
  • BRC Asia’s order book stood at c.S$1bn as of end-Sep; we expect this to underpin revenue growth of 30% y-o-y for FY21F. We also expect stronger GPM as BRC Asia continues to reap benefits from stronger procurement power and forecast BRC Asia to see a 47% y-o-y core net profit growth to S$40m in FY21F.

Reiterate ADD, with a higher target price of S$1.90

  • In our view, BRC Asia is a good proxy to Singapore’s construction sector recovery, given its market leadership in the reinforced steel industry. Reiterate ADD, as we anticipate earnings recovery in FY21F with further resumption of construction activities.
  • See BRC Asia Share PriceBRC Asia Target PriceBRC Asia Analyst ReportsBRC Asia Dividend HistoryBRC Asia AnnouncementsBRC Asia Latest News
  • Our target price for BRC Asia is raised to S$1.90 as we roll forward our valuation, now based on 1.57x CY21F P/BV (GGM: ROE 14.9%, cost of equity 9.7%, terminal growth 0.5%).
  • Downside risks include counterparty credit risk and further tightening of social distancing measures, which could hamper resumption of construction activities.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-12-02
SGX Stock Analyst Report ADD MAINTAIN ADD 1.90 UP 1.350