BRC Asia Ltd (SGX: BEC)

Excerpts from CGS CIMB report

• BRC Asia’s 1H22 net profit of S$39.8m (+108% yoy) was a strong beat, helped by continued recovery of construction activities in Singapore.
• We remain confident of further recovery in coming quarters as the labour shortage eases, given steady construction demand and work backlog.

Reiterate Add with a higher TP of S$2.50. BRC is our sector top pick for its relatively attractive valuation and higher dividend yield.

BRC Asia 1H22 net profit doubled, beating expectations

BRC’s 1H22 net profit rose to S$39.8m (+108% yoy), above expectations at 77% of our FY22F. Revenue grew 61% yoy to S$793.3m on the back of higher deliveries and higher steel prices (+40% yoy).

Meanwhile, 1H22 gross margins also expanded 0.6% pts yoy to 8.7%, due to a net reversal of S$1.8m provision for onerous contracts during the period (1H21: provision of S$28.9m). BRC proposed interim dividend of 6 Scts (1H21: 4 Scts), representing 3.6% dividend yield.

Expect further construction recovery in CY22F

According to the Ministry of Manpower, helped by the progressive lifting of border restrictions, non-resident employment (foreign workers) picked up pace in 1QCY22.

The ministry expects this trend to continue in 2QCY22, helping to alleviate labour market tightness, especially in sectors such as construction which have had to deal with scarce labour and delayed projects.

We believe this paves the way for further recovery in the construction activities in coming quarters, benefiting building material players like BRC.

Navigating well through macro challenges

In our panel discussion with building material players last week, we understand that while higher commodity, freight and energy costs have led to higher input costs for building material players YTD, they have generally been able to pass on the higher costs.

We believe BRC’s strong market share position also provides it with stronger procurement power to navigate current pricing volatility in the steel market and uphold margins.

We now forecast BRC to achieve 48% net profit growth to S$69.8m for FY22F.

Valuation/Recommendation

Reiterate Add with higher TP of S$2.50 as we see continued tailwinds for BRC as construction activities recover further. We raise our FY22-24F EPS by 32.7%-35.5% on the back of higher deliveries and margin assumptions.

Our TP is raised to S$2.50, still based on 1.53x CY22F P/BV (GGM: ROE 14.6%, cost of equity 9.7%, terminal growth 0.5%). With strong free cashflow generation, we believe BRC can potentially offer dividend yield of 9% (assume a 60% dividend payout ratio).

Re-rating catalysts include a faster-than-expected pace of recovery in Singapore construction activities; downside risks include counterparty credit risks, given the weakened financial health of the industry due to the Covid-19 pandemic.

You can read the company website here and find the full report here