BRC Asia - Phillip Securities 2022-12-05: Earnings Ahead, 1H23 To Be Impacted By “Heighted Safety”

BRC ASIA LIMITED (SGX:BEC)

BRC Asia - Earnings Ahead, 1H23 To Be Impacted By “Heighted Safety”

BRC Asia (SGX:BEC)'s FY22 net profit was ahead of our expectations at 112% of our FY22e forecasts. Revenue was in line at 99% of FY22e. Earnings were above expectations as higher-than-expected volume moved despite the “Heightened Safety” period imposed.
$11mil net reversal for onerous contracts made. With steel rebar prices declining ~20% in 2H22, BRC Asia benefitted from write-backs. Gross profit margins improved 500bps for the period.

BRC Asia's construction order book grew to $1.4bn from $1.135bn in the previous quarter. Strong demand for public housing and infrastructure projects in Singapore continued to boost the Group’s order books.
Maintain BUY on BRC Asia with a higher target price of S$2.30. Our target price is based on 7x FY22e P/E, lowered from 8x previously, on account of the uncertain external environment. But our target price is raised to $2.30 from $2.26 as we roll forward our valuation to FY23e. We kept FY23e earnings forecast unchanged as we expect construction activity to continue its recovery after 1H23.

Revenue was in line at 99% of FY22e. Earnings were above expectations as higher-than-expected volume moved despite the “Heightened Safety” period imposed by the Ministry of Manpower (MOM) from 1 Sept to 28 Feb 2023. The measures were announced after a spate of workplace fatalities since the start of the year prompted the m-o-m to intervene in the sector.
In view of its strong results, BRC Asia has declared a total of 12 cents of dividends (~55% payout), comprising 6 cents final and 6 cents special dividend to reward shareholders. FY22 dividends of 18 cents represents a dividend yield of 9.8%, exceeding our 16 cents estimate.

With steel rebar prices declining ~20% in 2H22, BRC Asia benefitted from $11mil of write-backs in onerous contracts. For FY22, BRC Asia generated a net reversal of provision of onerous contracts of $12.8mil. Correspondingly, gross profit margins improved 500bps for the period.
The management has guided for further reversals in onerous contracts for FY23 should steel prices remain at these levels.

Strong demand for public housing and infrastructure projects in Singapore continued to boost the Group’s order books. BRC Asia is benefitting from the backlog of projects that were postponed during the COVID-19 pandemic and the higher number of public housing projects that are being launched to meet demand.

As of 1 Sept 2022, the number of workplace fatalities stands at 36 for whole of 2022, up from the 28 workplace fatalities reported for the first six months of 2022, many of which were in the construction industry. As a result of the Heightened Safety period imposed by the m-o-m, local construction projects are, in general, progressing slower than expected. The time-outs and punitive measures imposed on the sector has slowed construction progress.

The “Heightened Safety” period from 1 Sept to 28 Feb 2023 in view of the concerning rise in workplace fatalities this year will see m-o-m adopt punitive measures on construction companies that have serious lapses such as unsafe workplace conditions or poor risk control. These companies are also required to conduct safety time-out by allocating time to review their safety procedures and complete the safety-time out activities.
These measures have a material impact on the time-line of the projects. The “Heightened Safety” period may also be extended if there is non-compliance.

BRC Asia’s order book inched up to $1.4bn from $1.135bn as the construction sector continues its recovery. We estimate that half of its order book will be fulfilled within the next 12-15 months.
HDB has announced that it will ramp up the supply of new build-to-order (BTO) flats over the next two years to meet the strong housing demand from Singaporeans. It plans to launch up to 23,000 flats per year in 2022 and 2023, which represents a significant increase of 35% from the 17,000 flats launched in 2021. Changi Airport’s Terminal 5 project will resume after being put on hold for two years due to the COVID-19 pandemic.
With an approximately 65% market share in the reinforced steel industry, we continue to see BRC Asia as a key beneficiary of the construction sector recovery.

We kept FY23e earnings forecast for BRC Asia unchanged as we expect construction activity to continue its recovery in 2Q23. We maintain our BUY recommendation on BRC Asia with a higher target price of S$2.30.
Our target price is based on 7x FY22e P/E, lowered from 8x previously (15% discount to historical average) on account of the uncertain external environment.
See

Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2022-12-05

SGX Stock Analyst Report BUY MAINTAIN BUY 2.30 UP 2.260