UOB Kay Hian analysts Llelleythan Tan and John Cheong have maintained their “buy” call on BRC Asia as the company posted robust results for the 3QFY2022 ended June.
They have, however, lowered their target price to $2.00 from $2.15 previously. The new target price is based on the same 0.7x FY2022 P/E, pegged to -0.5 standard deviation (s.d.) of BRC’s long-term average P/E (excluding outliers of over 2 s.d. at 25x), they say.
During the quarter, BRC Asia reported a net profit of $20.4 million, a 100% jump y-o-y. This was “in line with our expectations'', the analysts say, backed by higher delivery volumes and better construction demand.
However, this lower net profit figure was 23.2% lower q-o-q, due to a lower margin product mix in 3QFY2022.
Gross profit also showed a similar trend, up 106.7% y-o-y, but down 13.5% q-o-q as higher manpower and utilities costs compressed margins, leading to gross margin softening 2.6 percentage points q-o-q in 3QFY2022.
Nonetheless, BRC Asia’s orderbook remains robust at $1.15 billion, helped by increased demand for public housing and civil engineering works.
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The analysts expect the group to deliver half of its current orderbook in the next three to four quarters as BRC’s current production capacity of 70% starts to ramp up, pointing out that 3QFY2022 delivery volumes were higher q-o-q as demand for construction recovers.
But labour supply is still below pre-pandemic levels, and is expected to improve going into 4QFY2022.
Tan and Ong says that although its management noted that the influx of new foreign workers has aided in alleviating the labour shortage, many experienced workers are also returning home as borders get lifted.
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Due to the inexperience of these new workers, 3QFY0222 saw many fatal workplace accidents which led to sporadic stoppages of work. This is also compounded by emerging dengue clusters in workplaces, which led to several stoppages and checks as well.
“Overall, we expect Singapore’s labour supply recovery to eventually ramp up and normalise to pre-pandemic levels by 4QFY2022 or 1QFY2023,” they say.
In their report, the analysts have increased their revenue forecasts for the FY2022 to FY2024 after accounting for higher sales volumes.
They have, however, lowered their net profit forecasts for the same period due to lower gross margin assumptions. Tan and Ong’s net profit forecast for the FY2022, FY2023 and FY2024 have been lowered by 7.2%, 2.4% and 4.0% respectively.
“We reckon BRC is poised to post robust earnings in FY2022, backed by favourable industry tailwinds and higher steel prices,” the analysts write, noting that the company remains a “strong proxy” for Singapore’s construction sector
“However, we are cautious of any potential sharp moderation in steel prices, which may lead to a reversal of provisions and supernormal earnings thereafter,” they add. “Therefore, taking a conservative view, we have pegged our target price to -0.5 SD of BRC’s long-term average P/E instead of its mean”.
Meanwhile, SAC Capital analyst Peggy Mak has maintained her "hold" call on BRC Asia with an unchanged target price of $1.92.
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While BRC Asia's earnings for the 3QFY2022 was also in line with her expectations, Mak sees the total volume in the September quarter as "unlikely" to return to the levels seen in March. This is due to the stepped up checks by regulators at worksites.
"The lower delivery volume will keep inventory high and incur holding costs," she writes.
However, all is not lost, with construction demand remaining robust, underpinned by public housing construction to cope with the under-supply and curb run-away home prices.
En-bloc transactions have also gained pace, which would spur construction activities, Mak notes.
"A possible near-term risk is the climb in mortgage rates and potential measures to cool the buying fever, hence lowering developers’ appetite for new projects," she writes.
While rebar prices from China have corrected by some 24% from the recent peak in May's RMB5,258 ($1,062.64) per tonne, Mak believes steel prices will recover due to the current low inventory at the London Metal Exchange (LME), the shuttering of China production capacity due to power rationing, and the higher energy prices that lift the cost of production.
As such, Mak has raised her earnings estimates for the FY2022 by 4.6% to $76.5 million. This is to take into account "lower provisions for onerous contracts as steel price increase levels off", she says.
As of 1.31pm, shares in BRC Asia traded at $1.71, with a FY2022 P/B ratio of 1.1x and dividend yield of 5.3%.
