CGS-CIMB Research analyst Ong Kang Chuen has maintained his “add” call and an unchanged target price of $1.90 on BRC Asia after it saw a reversal from its net loss a year ago.
The company reported 3QFY2021 net profit of $10.2 million, a 6.7% increase q-o-q and in contrast to the $2.5 million net loss in 3QFY2020.
See also: BRC Asia back in the black with earnings of $10.2 million in 3QFY21
The reported net profit took into account $11.5 million worth of provision for onerous\ contracts during the quarter due to higher steel prices, but Ong added that this can be reversed later when projects are completed.
“We deem the set of results in line with expectations, with 9MFY2021 net profit making up 73.3% of our FY2021 forecast. BRC’s orderbook remained robust at $1.1 billion as of end-June,” he says.
Ong says he sees a possibility that there could be “light at the end of the tunnel” for the company, despite a lower construction output in Singapore in 2Q compared to 1Q (about 70% of pre-Covid-19 levels, compared to 1Q’s figure of 80%)
Looking ahead, he believes there is room for gradual output improvements from 4Q 2021 onwards as Singapore starts treating Covid-19 as endemic.
Key catalysts to look out for include productivity gains due to the loosening of social distancing measures in construction worksites, as well as easing entry restrictions for foreign workers.
Ong also says that while steel prices have rapidly increased internationally, BRC Asia has locked in steel inventory for the rest of the year, and hence should continue to retain healthy profit spreads on its existing orderbook.
We continue to expect FY2021 net profit to double to $40 million from $20.4 million in FY2020, a record high for the company.
Ong writes, “any reversal of provision for onerous contracts (upon complete execution of contracts, or reversal of steel price uptrend) could provide further upside to our forecasts.”
As such, he also expects a corresponding uplift in dividend payout, with his current forecast of eight cents per share representing a conservative assumption of 50% dividend payout ratio. This is compared to FY2019’s 60% figure and FY2020’s 70%.
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Ong concludes, “we continue to like BRC as a proxy for Singapore’s construction sector recovery, given its market leadership in the reinforced steel industry… Re-rating catalysts include positive newsflow highlighted above, as well as higher dividend payout for FY2021. Downside risks include counterparty credit risk”.
As at 3.30 pm, shares of BRC Asia traded at $1.48, with a FY2021 price to book ratio of 1.18 and dividend yield of 5.52%.
