BRC Asia Light at the end of the tunnel (Initiation) February 22, 2021 250

PSR Recommendation: BUY Status: Initiation
Target Price: 1.870
  • Record earnings of S$42mn and S$45mn expected for FY21e and FY22e respectively.
  • Construction demand is expected to recover to S$23bn – S$28bn in 2021 recovering from the S$21.3bn in 2020. Their huge market share of 70% means BRC is well positioned to capitalise on the growth.
  • Potential for dividend payout to recover from FY21e and FY22e.
  • Initiate coverage with BUY recommendation and target price of S$1.87. Our TP is derived based on 11x FY21e P/E, a 15% discount to it’s 10-year historical average P/E on account of the uncertain environment.

Company Background

Post the acquisition of Lee Metal in June 2018, BRC Asia is now the largest steel reinforcement supplier in Singapore with a dominating 70% market share.

 Company Background

Post the acquisition of Lee Metal in June 2018, BRC Asia is now the largest steel reinforcement supplier in Singapore with a dominating 70% market share.

Investment Merits

  1. Record earnings expected for FY21e and FY22e. We project record profit for FY21e and FY22e at S$42mn and S$45mn respectively on the back of a general recovery in the construction sector. We estimate that construction activity has resumed to about 75% of pre-COVID 19 levels at the moment, and we expect this to go up to 80% by June 2021 as construction activities continue to resume island wide.
  2. Construction demand is expected to recover to S$23.0bn – S$28.0bn in 2021 recovering from the S$21.3bn for 2020. We see BRC Asia’s leadership position in the reinforced steel industry as best positioned for a construction sector recovery. According to the Building and Construction Authority (“BCA”), construction demand is expected to recover from 2021 as construction activities resume. This will be supported by public residential developments and various infrastructure projects such as the construction of the Cross Island MRT.
  3. Potential for dividend payout to recover from FY21e and FY22e. We think the Group could potentially declare dividends of 10 and 11 Singapore cents for FY21e and FY22e respectively, translating into a dividend yield of 6.3% and 6.9% respectively for FY21e and FY22e. The Group’s final dividend for FY20 fell 60% vs. FY19 as earnings declined 36% due to headwinds in the construction industry last year. Despite this, the Group still declared a special dividend of four (4) Singapore cents for FY20, translating to a payout ratio of about 68% (up from 59% for FY19). Using the mid-point of the dividend payout ratio declared by the Group for FY19 and FY20, we think they could potentially declare dividends of 10 and 11 Singapore cents for FY21e and FY22e as construction activity resume in Singapore.

    Outlook

    We are positive on the outlook of the construction industry post circuit-breaker. As construction activities resume, demand for construction materials is expected to increase, leading to a re-rating of BRC Asia’s shares.

     

    Initiating coverage with BUY rating and TP of S$1.87

    We initiate coverage with a BUY recommendation and target price of S$1.87. Our TP is based on 11x FY21 P/E, a 15% discount to their historical average P/E on account of the uncertain environment. In our view, BRC Asia should trade at a higher premium to their historical P/E after the acquisition of Lee Metal in 2018 as this strengthened their market position considerably. Nonetheless, we remain cautious about the outlook for the industry as construction activity could remain subdued until a permanent solution for the pandemic is found.

Investment Merits

 

  1. Record earnings expected for FY21e and FY22e. We expect record profit for FY21e and FY22e at S$42mn and S$45mn respectively on the back of a general recovery in the construction sector. We estimate that construction activity has resumed to about 75% of pre-COVID 19 levels at the moment, and we expect this to go up to 80% by June 2021 as construction activities continue to resume island wide.

 

  1. Construction demand is expected to recover to S$23.0bn to S$28.0bn in 2021 recovering from S$21.3bn for 2020. We see BRC Asia’s leadership position in the reinforced steel industry as best positioned for a construction sector recovery. According to BCA, construction demand is expected to recover from This will be supported by public residential developments and upgrading works, the developments at Jurong Lake District, the construction of new healthcare facilities and various infrastructure projects such as the construction of the Cross Island MRT. While construction of mega projects such as Changi Airport Terminal Five and the expansion of two Integrated Resorts has been delayed, we see the eventual resumption of construction for these projects as a future catalyst for the company.

 

  1. Potential for dividend payout to recover from FY21e and FY22e. We think the Group could potentially declare dividends of 10 and 11 Singapore cents for FY21e and FY22e respectively for FY21e and FY22e. The Group’s final dividend for FY20 fell 60% vs. FY19 as earnings declined 36% due to headwinds in the construction industry last year. Despite this, the Group still declared a special dividend of four (4) Singapore cents for FY20, translating to a payout ratio of about 68% (up from 59% for FY19). Using the mid-point of the dividend payout ratio declared by the Group for FY19 and FY20, we think they could potentially declare dividends of 10 and 11 Singapore cents for FY21e and FY22e as construction activity resume in Singapore.

Initiating coverage with BUY and target price of S$1.87

 

We initiate coverage with a BUY recommendation and target price of S$1.87. Our TP is based on 11x FY21 P/E, a 15% discount to it’s 10-year historical average P/E on account of the uncertain environment. In our view, BRC Asia should trade at a higher premium to their historical P/E after the acquisition of Lee Metal in 2018 as this strengthened their market position considerably. Nonetheless, we remain cautious about the outlook for the industry as construction activity could remain subdued until a permanent solution for the pandemic is found.

Risks to our view include 1) Resurgence of COVID-19 cases in Singapore and in the foreign workers dormitories, and 2) Failure to bring in new foreign workers to alleviate the labour crunch.

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About the author

Profile photo of Terence Chua

Terence Chua
Senior Research Analyst
Phillip Securities Research

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.

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