UOB Kay Hian analyst Llelleythan Tan has maintained his buy call on BRC Asia, but has lowered his target price from $2 to $1.76.
In a Sept 23 report, Tan said that being the market leader in the supply of steel products in Singapore, BRC is set to benefit from the recovery in the construction sector and major upcoming projects including the new Tuas Mega Port, Changi Airport Terminal 5 and Greater Southern Waterfront.
Tan noted that these hefty construction projects require heavy investments with the first phase of Tuas Mega Port costing $2.42 billion and the cost of Changi Airport Terminal 5 estimated at $10billion.
“Moving forward, we reckon that the upcoming projects will provide BRC with strong revenue growth due to the company’s dominant market share and track record,” Tan says.
This is also enhanced by the passage of a bill in May 2021 by the Singapore government that allows it to borrow $90 billion in bonds to fund national infrastructure projects and upgrades
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Furthermore, he thinks that the recent investment from Hong Leong Asia (HLA), making it the second-largest shareholder with a 20% stake, should boost market confidence and lead to growth opportunities for BRC.
Earlier in September, BRC allotted just over 31 million new shares to HLA at $1.48, while HLA also bought 15 million more shares from existing investors at the same issue price. The proposed placement would strengthen its balance sheet as BRC is planning to repay its outstanding bank borrowings with the net proceeds.
While he does think that Singapore’s construction sector is on the road to recovery, with figures from the Ministry of Trade and Industry (MTI) saying that the construction sector grew by 106.2% y-o-y, a sharp turnaround from the 23.2% y-o-y contraction in the previous quarter.
This was largely due to the expansion of both public and private sector construction works. However, he highlighted this was off a low base in 2Q2020 as Singapore was in a full lockdown. In absolute terms, construction GDP was still 29% below pre-pandemic levels in 2019.
Looking forward, MTI has projected that the construction sector would experience some recovery but would be weighed down by labour shortages till end-2021 when border restrictions may be eased.
The Building and Construction Authority (BCA) projects total construction demand for 2021 is expected to range from $23 billion- $28 billion, while annual construction demand for 2022 to 2025 is expected to reach $25 billion- $32 billion.
Although not back at pre-pandemic levels, the 2021 construction demand is an improvement from the $21.3 billion in 2020.
However, Tan cautions that with tighter foreign labour supply and a re-emergence of Covid-19 clusters in dormitories, the construction sector is facing labour constraints that have resulted in rising labour costs along with lower productivity levels.
“Through internal checks, we understand that in spite of strong construction demand, current labour shortfall is affecting delivery rates and delaying project completion dates,” he observes
But over 90% of workers in Singapore’s dormitories have completed the full regimen of Covid-19 vaccination, and Singapore has also temporarily relaxed foreign worker hiring rules, such as the removal of minimum work experience for work permit holders.
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This may help to alleviate current labour constraints and maintain a resilient labour workforce for the construction sector.
For BRC Asia, Tan says that rising steel prices would have minimal impact as “we understand from management that the company’s steel prices have been locked in on a rolling forward 6-9 month basis. This would help protect BRC’s margins in the face of rising steel prices caused by Covid-19 restrictions.’
According to Fitch, global steel prices are expected to decline in 2022, which would help boost the construction sector moving forward.
As of 4.13 pm, shares of BRC are trading at $1.46, with an FY2021 price to book ratio of 1.3 and dividend yield of 6.1%.
