BRC ASIA LIMITED (SGX:BEC)
BRC Asia - Proxy To Recovery In Construction Sector
- BRC Asia is proxy to the recovery in Singapore’s construction sector, which should continue as business activities normalise;
- Being a leader in Singapore’s steel rebar and prefabricated reinforcing steel product markets should translate to higher margins;
- S$1.09bn orderbook, with jobs that will be delivered over the next five years. This implies a book-to-build ratio of 1.2x based on FY19 (Sep), and 1.8x based on FY20 revenues;
- Reasonably valued amid expectations of a strong earnings rebound.
BRC Asia - Company Profile
- Incorporated in Singapore in 1938 as Malayan Wire Mesh & Fencing, BRC Asia (SGX:BEC) pioneered the use of prefabricated steel mesh in Singapore’s construction industry. The company changed to its current name in 1998, and was listed on the SGX in Jul 2000.
- Post the Lee Metal Group acquisition in Jun 2018, BRC Asia doubled its operational capacity, and now has Singapore’s largest production capacity in terms of prefabricated reinforcing steel products. With factories here, Malaysia, and China, it caters to builders in the public and private housing sectors, as well as the commercial and industrial spaces.
BRC Asia - Investment Highlights
Positive outlook for Singapore’s construction sector.
- According to Singapore’s Building and Construction Authority (BCA), construction demand, which had declined in 2020 to S$21.3bn from 2019’s S$33.5bn, is expected to improve to S$23-28bn in 2021. The public sector is expected to account for about 65% of the new contracts, amid anticipated stronger demand for public housing and infrastructure projects.
- The BCA also expects total nominal construction output to increase to S$24-27bn in 2021 from S$19.5bn in 2020, which will be supported by an anticipated improvement in construction demand in 2021, and the catch-up on the construction activity backlog caused by the COVID-19 pandemic in 2020. This improvement in construction demand and output should bode well for the reinforcing steel industry, where BRC Asia is a market leader.
Market leadership.
- Based on data available from the Competition and Consumer Commission of Singapore, BRC Asia has a 40-60% share of the republic’s steel rebar market. It also holds a 50-70% share of the country’s steel wire mesh segment.
- With the 2018 acquisition of Lee Metal, we believe the group’s steel products supply market share will have increased to 60-70%. This leadership position enables BRC Asia to operate at an optimal scale, thereby gaining from stronger purchasing power, lower wastage, and improved productivity. This, in turn, has been reflected in the group’s improving profit margins.
Strong orderbook.
- As at 31 Dec 2020, BRC Asia’s sales orderbook stood at S$1.09bn. Based on (pre-pandemic) FY19 reported revenue, this outstanding orderbook implies a 1.2x book-to-build ratio. Based on FY20 revenue, which was impacted by the COVID-19 pandemic, the implied book-to-build ratio would be 1.8x.
Looking to pare down debt.
- In January, BRC Asia conducted a placement exercise involving 10m shares to investors at S$1.42 per unit, representing about 4.1% of its enlarged issued shares. According to the company, the placement was oversubscribed, and was taken up by established financial institutions and market leaders in the local insurance and asset management space. The funds received from the placement will be used to repay outstanding bank borrowings.
BRC Asia - Company Report Card
Latest results.
- BRC Asia’s 1QFY21 revenue came in at S$213.4m (-6% y-o-y, +73% q-o-q) as construction activities continued to pick up. Its gross margin of 11% in 1QFY21 dipped slightly, but was still at a healthy level (-2.1 ppts y-o-y, -1.2 ppts q-o-q). 1QFY21 net profit of S$9.6m pointed to a substantial recovery compared with 4QFY20 numbers, despite a provision of S$7.9m for onerous contracts in light of the higher steel prices.
Dividend.
- In May 2019, BRC Asia announced a dividend policy for FY19-20. The group aims to pay dividends to shareholders with a target annual payout ratio of at least 30% of recurring net profit. Its final dividend for FY20 fell 60% y-o-y, as earnings declined 36% due to headwinds in the construction industry. Despite this, BRC Asia declared a special dividend of S$0.04 per share for FY20, translating into a payout ratio of about 68% (up from 59% for FY19).
Management.
- The group is a professionally run company. CEO Seah Kiin Peng has held this post since 2018, having been with BRC Asia since 2010. More professionals joined the group after Esteel Enterprise became the largest shareholder in Oct 2017. Xu Jiguo was appointed as Chief Procurement Officer in Nov 2017, taking over the responsibility for steel procurement and trading. Zhang Xingwang joined as COO in Dec 2017.
- To strengthen BRC Asia’s interaction with investors and other capital market participants, Darrell Lim Chee Lek joined the group in May 2019. Each one of the aforementioned has strong prior experience in their respective fields.
BRC Asia - Investment Case
A good proxy to recovery in Singapore’s construction sector.
- Progressive improvement in Singapore’s construction activity amid gradual relaxation social distancing measures at construction sites should help BRC Asia deliver strong earnings growth in 2021. Its strong orderbook and market leadership position in Singapore for prefabricated reinforcing steel products will enable the group to optimise costs and uphold current margins. We believe the valuations are reasonable amid expectations of strong earnings growth.
- See
Key risks.
- Resurgence of COVID-19 cases in Singapore and in the foreign workers dormitories, and failure to bring in new foreign workers to alleviate the labour crunch.
- BRC Asia (SGX:BEC) is one of the Top Singapore Small Cap Companies highlighted in RHB's 20 Jewels 2021 Edition.
Shekhar Jaiswal
RHB Securities Research
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https://www.rhbinvest.com.sg/
2021-05-05
SGX Stock
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