BRC Asia - CGS-CIMB Research 2021-05-05: Steel Looking Good

BRC ASIA LIMITED (SGX:BEC)

BRC Asia - Steel Looking Good

Despite a S$20.9m provision for onerous contracts, BRC Asia's 2QFY21 net profit of S$9.5m was in line with expectations. Maiden interim dividend of 4cents was declared.
Construction activity recovery continues, although pace of improvement could be temporarily dampened by government’s barring of workers from India.
We believe BRC Asia is on track to double its net profit to S$40m in FY21F. Reiterate ADD and target price of S$1.90.

BRC Asia (SGX:BEC) recorded a S$20.9m provision for onerous contracts in 2QFY21 (Jan 2021 to Mar 2021) – this is a non-cash accounting treatment where it has to take mark-to-market losses due to higher steel market prices, and the losses can later be reversed and credited to its profit and loss statement when deliveries under such sales contracts are executed. Despite that, BRC Asia reported net profit of S$9.5m (-4% y-o-y) for the quarter.
We deem the set of results in line with expectations, with 1HFY21 net profit making up 47.9% of our FY21F.
Cautiously optimistic of broad-base improvements to Singapore’s construction demand and output in 2021 and beyond, BRC Asia declared a maiden interim dividend of 4cents/share, representing 2.6% dividend yield.

Construction activity in Singapore has recovered to ~80% of pre-COVID levels in 1QCY21 (4QCY20: 73% of pre-Covid level). We expect construction activities in Singapore to improve further as contractors adapt better to a new working environment, although the pace of recovery in 2QCY21F could be dampened by Singapore government’s recent decision to temporarily bar entry of workers from India and its four neighbouring countries.
BRC Asia’s orderbook remained robust at S$1.1bn as of end-Mar, and we expect healthy replenishment with more public sector contracts set to be awarded this year.

Despite the rapid escalation of international steel prices year-to-date, we understand that BRC Asia has locked in purchase of inventory requirements for the rest of the year, and hence should continue to retain healthy profit spreads on its existing orderbook.
We continue to expect BRC Asia's FY21F net profit to double to S$40m (FY20: S$20.4m), a record high for the company. Any reversal of provision for onerous contracts (upon complete execution of contracts, or reversal of steel price uptrend) could provide further upside to our forecasts.

We continue to like BRC Asia as a proxy for Singapore’s construction sector recovery, given its market leadership in the reinforced steel industry. Reiterate ADD with an unchanged target price of S$1.90, based on 1.57x CY21F P/BV (GGM: ROE 14.9%, cost of equity 9.7%, terminal growth 0.5%).
See
Potential re-rating catalysts include loosening of social distancing measures in the workplace with further COVID-19 vaccination rollout.
Downside risks include counterparty credit risk.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-05-05

SGX Stock Analyst Report ADD MAINTAIN ADD 1.900 SAME 1.900