BRC Asia - UOB Kay Hian 2022-05-27: 1HFY22 Above Expectations, Robust Earnings As Construction Resumes.


BRC Asia - 1HFY22 Above Expectations, Robust Earnings As Construction Resumes.

  • BRC Asia reported strong 1H22 earnings of S$39.8m (+108% y-o-y, +43% h-o-h) as 2QFY22 net profit surged to S$26.5m (+178% y-o-y, +99% q-o-q). The strong outperformance was led by increased delivery volumes and higher steel prices. Labour supply recovery is underway and management noted that delivery volumes will revert to pre-pandemic levels by 1QFY23.
  • BRC Asia currently trades at 4.8x FY22F P/E, attractive in our view. Maintain BUY with a slightly higher target price of S$2.15 (S$2.02 previously).

BRC Asia's 1HFY22 results surpassed expectations.

  • BRC Asia (SGX:BEC) reported 1HFY22 revenue and net profit of S$793.3m (+61% y-o-y, +17% h-o-h) and S$39.8m (+108% y-o-y, +43% h-o-h) respectively, forming 54% and 71% of our full-year estimates, surpassing our expectations. Stronger delivery volumes coupled with elevated steel rebar prices boosted the group’s earnings. The group declared a higher 1HFY22 dividend of 6 cents/share, compared to 4 cents/share in 1HFY21.
  • Beneficial industry tailwinds led to a strong 2QFY22. BRC Asia's revenue and net profit grew by 56.1% y-o-y and 177% y-o-y respectively in 2QFY22, mainly due to higher construction activities and elevated steel prices caused by the ongoing Ukraine-Russia conflict. We understand that BRC Asia has been able to pass on the higher material costs to customers.
  • Also, in Mar 22, Singapore started to fully reopen its international borders, allowing foreign workers back into Singapore, easing the persistent labour supply-demand imbalance. However, management has noted that although the influx of foreign workers would aid in alleviating the labour shortage, many workers are also returning back home as borders get lifted. We expect Singapore’s labour supply recovery to eventually ramp up and return to pre-pandemic levels by 4QFY22/1QFY23.

Resolute orderbook and diversified supply chain.

  • BRC Asia’s orderbook remains robust, standing at S$1b, lower than the S$1.3b at end-1QFY22. This is due to higher delivery volumes made in 2QFY22. We expect the group to deliver half of its current orderbook in the next 3-4 quarters as BRC Asia’s current production capacity of around 70% starts to ramp up.
  • Also, BRC Asia’s is not affected by China’s ongoing COVID-19 lockdowns as BRC Asia has diversified its supply chain to regional suppliers closer to home.

Still room for growth in the construction sector.

  • The construction sector grew by 1.8% y-o-y in 1Q2022 as Singapore eased its COVID-19 restrictions. In absolute terms, the sector still remained 25.3% below its pre-pandemic levels as labour supply-demand imbalance persists. However, with the lifting of border restrictions, Singapore’s labour shortage is expected to ease moving forward as construction companies step up hiring, ramping up construction activities.
  • Also, Singapore has a strong pipeline of upcoming public sector projects along with an increased supply in HDB launches. BRC Asia remains a strong proxy for Singapore’s construction sector, given its commanding market share domestically.

BRC Asia - Earnings forecast and recommendation

  • We increase our FY22-24 earnings forecast for BRC Asia by 27-53%, on the back of rising steel prices and a better-than-expected recovery in construction demand. We increase our FY22-24 net profit forecasts by 52.8%, 37.2% and 27.7% respectively.
  • Maintain BUY call on BRC Asia with a higher target price of S$2.15 (S$2.02 previously), based on 7.0x FY22F P/E, pegged to -0.5 standard deviation of BRC Asia’s long-term average P/E (excluding outliers of > 2 standard deviation at 25x).
  • We reckon BRC Asia is poised to post robust earnings in FY22, backed by favourable industry tailwinds and higher steel prices. However, we are cautious of any potential sharp moderation in steel prices which may lead to a reversal of provisions and supernormal earnings thereafter. Therefore, taking a conservative view, we have pegged our target price to -0.5 standard deviation of BRC Asia’s long term average P/E instead of its mean.
  • See
  • Share price catalysts:
    • Faster-than-expected recovery in construction activities.
    • Complete relaxation of foreign labour restrictions.
    • More public housing projects awarded.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-05-27
SGX Stock Analyst Report BUY MAINTAIN BUY 2.15 UP 2.020