BRC Asia - CGS-CIMB Research 2021-08-05: Light At The End Of Tunnel?

BRC ASIA LIMITED (SGX:BEC)

BRC Asia - Light At The End Of Tunnel?

Despite a S$11.5m provision for onerous contracts, BRC Asia's 3QFY21 net profit grew 6.7% q-o-q to S$10.2m and showed strong reversal from last year’s losses.
Construction activities in Singapore remained healthy at ~70% of pre-COVID-19 levels in 2QCY21. We see room for further output gains in months ahead.
We believe BRC Asia is on track to double its net profit to S$40m in FY21F. Minimal capex could point to higher dividend payout. Reiterate ADD.

BRC Asia (SGX:BEC) reported 3QFY21 (Apr 2021 to Jun 2021) net profit of S$10.2m (+6.7% q-o-q), a reversal from 3Q20’s S$2.5m net loss. The reported net profit took into account S$11.5m worth of provision for onerous contracts during the quarter (which can be reversed later when projects are completed) due to higher steel prices.
We deem the set of results in line with expectations, with 9MFY21 net profit making up 73.3% of our FY21F.
BRC Asia’s orderbook remained robust at S$1.1bn as of end-Jun.

Construction output in Singapore tapered slightly to ~70% of pre-COVID-19 levels in 2QCY21 (1QCY21: ~80% of pre-COVID-19 levels) mainly due to workforce constraints, as Singapore tightened inflow of foreign workers during the quarter. Nevertheless, BRC Asia was able to achieve 21.8% q-o-q revenue growth – we understand that the growth was driven mainly by steel price increases, while volumes held relatively steady.
Looking ahead, we believe there is room for gradual output improvements from 4QCY21 onwards as Singapore starts treating COVID-19 as endemic.
Key catalysts to look out for include:
1. productivity gains due to loosening of social distancing measures in construction worksites, and
2. easing entry restrictions for foreign workers.

Despite the rapid increase in international steel prices year-to-date, we understand that BRC Asia has locked in steel inventory for the rest of the year, and hence should continue to retain healthy profit spreads on its existing orderbook.
We continue to expect FY21F net profit to double to S$40m (FY20: S$20.4m), a record high for BRC Asia. 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.
In view of stronger earnings, we also expect a corresponding uplift in dividend payout. Our current dividend forecast of S$0.08 represents a conservative assumption of 50% dividend payout ratio (FY19: 60%; FY20: 70%) from BRC Asia.

We continue to like BRC Asia as a proxy for Singapore’s construction sector recovery, given its market leadership in the reinforced steel industry.
See
Reiterate ADD on BRC Asia 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%).
Re-rating catalysts include positive newsflow highlighted above, as well as higher dividend payout for FY21F.
Downside risks include counterparty credit risk.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-08-05

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