The Positives
+ 9MFY22 revenue and net profit was in line with our expectations at 75%/75%. Net profit rose 113.4% YoY driven by the continued recovery in the construction sector and the moderation of steel prices. We estimate that volumes grew ~30% YoY in 3Q22, driven by the increase in work activity at construction sites. According to the Ministry of Trade and Industry (MTI), the local construction sector grew 3.8% in the second quarter, faster than the 1.8% growth in the preceding quarter. This was in part due to the relaxation of border restrictions on the inflow of migrant workers.
+ Net reversal for onerous contracts made in 3QFY22. Steel rebar prices declined ~6% during the period. We believe the Group benefitted from write-backs in onerous contracts in the latest quarter with steel prices moderating. Recall that for 1H22, the Group benefitted from a $1.8mn net reversal for onerous contracts as contracts were being fulfilled with steel rebar prices down 13.6% during that same period. The Group generated $69mn in free cash flows in 3QFY22, that was used to lower gearing to 0.61x from 0.83x in 1H22.
+ Construction order books inched up slightly to $1.135bn (vs $1bn 2Q22). Strong demand for public housing and infrastructure projects in Singapore continued to drive up 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.
The Negatives
– Construction site activity levels adversely affected by workplace fatalities and dengue. In the first six months of 2022, the Ministry of Manpower (MOM) reported 28 workplace fatalities, many of which were in the construction industry. This led to a call for companies to conduct a safety time-out on 9 May 2022. In addition, in 1H22, more than 12,000 cases of dengue cases were reported, far exceeding the 5,258 cases logged in the whole of 2021. This resulted in a spate of stop-work orders issued by the authorities to construction sites, which impeded construction progress.
Outlook
Construction sector continue to see faster pace of recovery in 2Q22; increase in activity for rest of 2022 expected. The Group’s order book inched up to $1.135bn from $1bn as the construction sector continues its recovery. We estimate that half of its order book will be fulfilled within the next 12-15 months.
According to the MTI, in absolute terms, the value-add of the sector is still below its pre-pandemic level, but improved to 23.7% from 25.3% as activity at construction worksites continued to be weighed down by labour shortages. Despite this, we see the labour shortage situation easing with the relaxation of border restrictions and remain positive on the outlook for the sector.
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.
Terence specialises in the consumer, conglomerate and industrials sector. He has over five years of experience as an analyst in the buy- and sell-side. As an institutional fund management analyst, he sat on the China-Hong Kong desk. Terence was ranked top 3 for Best Analyst under the small caps and energy category in the Asia Money poll 2018.
He graduated from the Singapore Management University with a major in Finance (Honours), and is the honoured recipient of the CFA scholarship.
