BRC ASIA LIMITED (SGX:BEC)
BRC Asia - 1QFY22 Excellent Quarter As Demand For Construction Heats Up
- BRC Asia reported strong 1QFY22 net profit of S$13.3m, in line with our expectations, led by improving labour supply as well as better construction demand. Orderbook remains robust at S$1.3b, helped by increased demand for public housing and civil engineering works. Labour supply is still below pre-pandemic levels and is expected to improve going into FY22.
- We reckon that BRC Asia’s recovery has just started and is an attractive value play at 7.4x FY22F P/E.
- Maintain BUY call on BRC Asia with a higher target price of S$2.02.
BRC Asia's robust 1QFY22 results, in line with expectations.
- BRC Asia (SGX:BEC) reported strong 1QFY22 net profit of S$13.3m (+38.8% y-o-y, -24.6% q-o-q), forming 25.5% of our full-year estimates, in line with expectations. The drop in net profit q-o-q was due to 1QFY22 being a seasonally slow quarter. 1QFY22 revenue (+67.5% y-o-y, +6.5% q-o-q) and gross profit (+12.3% y-o-y, +6.5% q-o-q) surged as social distancing measures eased and construction activities returned.
- Labour supply recovering. Labour supply has gradually improved since Oct 21 due to Singapore’s reopening of its international borders but still remains below pre-COVID-19 levels. Recent outbreaks of the Omicron variant have dampened the recovery slightly as Singapore’s government had become more stringent in allowing foreign workers to enter the country. Overall, worksite activity is expected to start ramping up around 2H22 as labour supply recovers; management expects to see a significant recovery in foreign labour over the next 3-4 months.
- Provisions to reverse. Management noted that provisions for onerous contracts for 1QFY22 were not significant. Also, if steel prices were to stay at current levels, management expects to see some reversals for provisions, helping boost margins for FY22.
- Orderbook strong via dominant market share. BRC Asia has maintained its dominant market share and has seen its orderbook grow steadily to S$1.3b from S$1.2b last quarter due to higher steel prices. Competition wise, there has been an increase in JVs by smaller competitors bidding for projects as the industry has been hit hard. Also, there are risks of new entrants as demand for public housing ramps up.
Outlook for the construction sector remains positive.
- Singapore’s Building and Construction Authority (BCA) projects total construction demand for 2022 at S$27b-32b, while 2023-26 construction demand is forecasted at S$25b-32b per year. According to BCA, public sector projects and civil engineering works would contribute 60% of 2022’s total construction demand. Some notable projects include the relocation of Singapore Science Centre, Cross Island Line, Changi Terminal 5, the Toa Payoh Integrated Development and a new integrated hospital in Bedok.
- Supply of BTO flats to increase. To keep up with the rising demand, the Housing & Development Board (HDB) announced that it plans to launch up to 23,000 flats per year in 2022 and 2023, a significant increase from the last three years, where a combined 48,509 flats were launched (16,170 flats per year). As HDB housing forms a significant part of BRC Asia’s orderbook, the increase in supply would help support and boost BRC Asia’s revenue moving forward.
- Government spending to spur public demand. In May 21, the government passed the Significant Infrastructure Government Loan Act (Singa) that would help boost infrastructure spending in Singapore. Under the bill, the government will borrow up to S$90b by issuing bonds to help finance long-term infrastructure that would last for 50 years. Some of the infrastructure projects include the new MRT lines such as the Cross Island and Jurong Regional Lines. The bill is expected to finance the huge upfront costs of upcoming projects along with an expected pipeline of projects for the next 15 years.
- With strong support for infrastructure spending from the government, we reckon construction companies, such as BRC Asia, will benefit from the commencement of these infrastructure projects.
BRC Asia - Earnings forecast revision & recommendation
- Raise revenue and earnings forecasts for FY22-24, on the back of sturdy demand for construction activities in the medium term and a stronger-than-expected recovery in labour supply. We increased our FY22-24 revenue forecasts for BRC Asia to S$1,488m (S$1,246m), S$1,667m (S$1,395m) and S$1,829m (S$1,530.7m) respectively. We also lift our FY22-24 net profit forecasts for BRC Asia to S$55.2m (S$52.2m), S$65.6m (S$59.2m) and S$79.4m (S$67.1m) respectively.
- Maintain BUY with a higher target price of S$2.02 (previously S$1.91), based on the same 8.8x FY22F P/E. This is pegged to -0.5 standard deviation of BRC Asia’s long-term average (excluding outliers of > 2 standard deviation at 25x). The exclusion is primarily from the high base in FY16-17.
- Key re-rating catalysts would be the discovery of a new Omicron vaccine and the complete removal of COVID-19 restrictions.
- See
- Key risks: Credit risk from smaller construction players.
- Catalysts:
- Faster-than-expected recovery in construction activities.
- More public housing projects awarded.
- Complete relaxation of foreign labour restrictions.
Llelleythan Tan
UOB Kay Hian Research
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John Cheong
UOB Kay Hian
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https://research.uobkayhian.com/
2022-02-16
SGX Stock
Analyst Report
2.02
UP
1.760
