BRC Asia - Phillip Securities 2021-08-26: Stronger Order Fulfillment


BRC Asia - Stronger Order Fulfillment

  • BRC Asia (SGX:BEC)'s 3Q21 earnings of S$10.2mn in-line, at 24.4% of our estimates. 1H is seasonally weaker.
  • Stronger order fulfillment lifted sales q-o-q. The pipeline remains healthy with order book steady at S$1.1bn. Half could be fulfilled within the next 12-15 months.
  • Credit situation stable. Provisions for receivables impairment better than expected at 1.7% of total receivables for 9M21, lower than the 3% we imputed.
  • BRC Asia's net gearing rose 4x to 1.1x for working capital needs. As steel prices remain elevated, we expect inventory costs and net gearing to remain high in FY21e-FY22e.
  • Maintain BUY rating on BRC Asia with lower target price of S$1.79, from S$1.87. FY21e-FY22e earnings reduced by 9.2% and 10.8% as we incorporate higher finance costs from the increased debt load.

BRC Asia's 3Q21 - The Positives

Stronger order fulfillment q-o-q.

  • In spite of tighter movement controls from mid-May to end- June in Singapore, order deliveries went up. Movement controls were tightened further from early July to mid-August as COVID-19 infection cases surged. This slowed down the import of foreign labour.
  • With vaccinations nearing 80%, Singapore is close to achieving herd immunity, which could alleviate some of its labour constraints. BRC Asia has a sizeable amount of projects in the pipeline, with order book steady at about S$1.1bn. We estimate that half will be fulfilled within the next 12-15 months.

Dividend guidance maintained for FY21e.

  • Despite challenging circumstances in the construction sector, dividend guidance for FY21e is unchanged. In the last two years, payouts averaged 65%, beating its dividend policy of about 30%. We keep our FY21e estimate of S$0.08 per BRC Asia share as the outlook is expected to be stable for the rest of FY21.

Provision for receivables impairment better than expected.

  • Provisions for impairment loss on trade receivables were S$0.5mn in 3Q21, bringing 9M21 total provisions to S$3.0mn or 1.7% of total receivables. This was lower than our 3% estimates. We are however, keeping our FY21e provisions unchanged as the recent lockdown in Malaysia and the tightening of foreign labour supply in Singapore are expected to put some stress on the construction industry.

The Negative

Gross margins contracted 60bps as manpower costs rise.

  • Manpower costs in 3Q21 rose as the cost of providing for its foreign labour force increase. The company also provided for another S$11.5mn in 3Q21 bringing total provisions to date S$43.4mn. The provisions reflect a continued escalation of international steel prices.
  • Still, management guided that none of the contracts in the books are onerous as contracts are signed at a profit and hedged. As BRC Asia hedges its steel prices, some provisions will be progressively reversed as deliveries are made. Provisions for onerous contracts are made for sales contracts under which costs to meet obligations are expected to exceed their sales value. These provisions are reversed when the contractual obligations are met or no longer exist or when the costs to meet the obligations no longer exceed the sales value.

Net gearing rose 4x to 1.1x as working capital needs increased due to higher inventory costs and sales.

  • Total borrowings increased by S$260.3mn in 3Q21 as higher sales necessitated higher working capital. BRC Asia's net gearing rose to 1.1x from 0.2x in the previous quarter in preparation for a seasonally stronger second half. As steel prices remain elevated, we expect inventory costs and net gearing to remain high in FY21-22e.


Resurgence of COVID-19 cases in Malaysia and Singapore.

  • Record daily COVID-19 cases in Malaysia triggered a full lockdown on 1 June for 14 days. This has since been extended twice, with no end date in sight. As many building materials come from Malaysia, the lockdowns have affected construction progress in Singapore. This in turn slows down the drawdown of reinforcing steel.
  • In Singapore, a resurgence of COVID-19 in April also led to a re-tightening of foreign-labour supply, exacerbating construction delays and delaying the recovery.

Construction demand to improve to S$23-28bn in 2021.

  • The Building and Construction Authority has finalised 2020 construction demand at S$21bn. It expects construction demand to improve to S$23-28bn in 2021. The public sector is expected to contribute 65% of the new contracts or S$15-18bn, to meet stronger demand for public housing and infrastructure.
  • BCA also forecasts that average construction demand in 2022-2025 will be S$25-32bn per year, excluding the development of Changi Airport Terminal 5 and expansion of the two integrated resorts. The public sector is expected to contribute 56% to the demand.
  • As our forecasts have not included these projects, there is upside if they become live. In the near term, pipeline projects that will likely support the group’s growth are the Singapore Science Centre’s relocation, Toa Payoh integrated development, Alexandra Hospital redevelopment, Bedok’s new integrated hospital, Phases 2-3 of the Cross Island MRT Line and Downtown Line’s extension to Sungei Kadut.

Maintain BUY with target price of S$1.79

Terence Chua Phillip Securities Research | 2021-08-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.79 DOWN 1.870