UOB Kay Hian, citing an improving outlook and an attractive yield of 10%, has upgraded BRC Asia BEC to 'buy' along with a higher target price of $2.07, from $1.73.
Analysts Llelleythan Tan and Heidi Mo point out that the steel supplier's FY2023 earnings for the year ended Sept was ahead of their projections, if not for a one-off impairment on a joint venture.
Even so, BRC Asia declared yet another special dividend, bringing the total paid for FY2023 to 16 cents per share, equivalent to a payout ratio of 58%. For FY2022, the company paid 18 cents per share in total.
"As a recap, the group does not have a formal dividend policy but we opine that it would be able to sustain its historical average 60% payout ratio in the current FY2024, backed by its strong operating cash flows. Based on our estimates, this implies an attractive FY24 dividend yield of around 10%," state Tan and Mo in their Dec 12 note.
As at end of FY2023, BRC Asia has reduced its net gearing to 46% from 76% a year ago, thanks to its strong operating cash flows. However, no thanks to higher rates, its interest coverage ratio worsened to 8x instead of 16x. "Moving forward, we expect BRC to continue to pare down its debt levels," the analysts say.
Nonetheless, BRC Asia enjoys a better outlook thanks to strong demand from the large number of public housing projects in the pipeline, as well as other upcoming infrastructure projects including Changi Airport Terminal 5 and the subsequent phases of the Tuas Mega Port over the longer term. As at the end of FY2023, its order book was worth $1.3 billion.
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While Tan and Mo tweaked their earnings projection for FY2024 and FY2025, they have raised their estimate for FY2026.
Along with the higher earnings, they've derived their new target price of $2.07 which is based on 7x FY2024 earnings, which is pegged to 0.5SD of its long-term average PE.
"In our view, BRC's attractive 10% dividend yield would help support share price performance moving forward," they add.
