FY21: Excellent Results, Well-Positioned For A Recovery

BRC’s FY21 net profit of S$47m (+131% yoy) exceeded our expectation by 12%. Core operations in construction saw a sequential recovery as orderbook grew to S$1.2b. BRC declared a final dividend of 8 S cents with a total dividend of 12 S cents for FY21. We expect BRC to deliver double-digit growth in 2022 as it continues to ride on the recovery trend in construction demand. Maintain BUY with a 9% higher target price of S$1.91.

RESULTS

Results exceed expectations, driven by other income. BRC Asia’s (BRC) reported FY21 revenue and profit of S$1,168.6m and S$47.0m, forming 100% and 112% of our full-year estimates respectively. The outperformance in net profit was due to an increase in forex gain and government grants. Excluding other income, FY21 net profit would have met 100% of our full-year forecasts. The group declared a final dividend of 4 S cents with FY21 full-year dividend amounting to 8 S cents (vs FY19: 6 S cents). Payout ratio increased was at 61%, higher than the company’s dividend policy of 30%.

Recovery underway but dragged by rising material costs. Compare with FY20’s low base, FY21 revenue soared by 90.8% yoy to a record-high S$1,168m, backed by higher sales volume and rising selling prices. However, BRC’s FY21 gross margin dropped to 7.0% (10.8% in FY20) as provisions of S$45.3m for onerous contracts were recorded as compared with a S$6.4m reversal in FY20, largely due to escalating steel prices. Management has noted that if steel prices soften, the provisions may be reversed and help lift margins. Excluding an S$14.4m loss from associates in FY20, FY21 net profit grew by 35.1% yoy.

Orderbook growing while delivery volumes recover. BRC has maintained its dominant market share, and has seen its orderbook grow steadily to S$1.2b as COVID-19 restrictions are gradually lifted and more projects have been awarded over the last two quarters. However, due to persistent labour shortage, BRC’s capacity utilisation remains 20% below pre-COVID-19 levels (2019). Management reckons that worksite activity would start ramping up around 2H22. As Vaccinated Travel Lanes (VTL) start, management expects the return of foreign labour to happen over the next 3-4 months.

STOCK IMPACT

Medium-term outlook for the construction sector remains positive. Singapore’s Building and Construction Authority (BCA) projects total construction demand for 2021 at S$23b-28b, while 2022-25 construction demand is forecast at S$25b-32b per year. According to BCA, public sector projects and civil engineering works would contribute 60-70% of 2022-25’s of total construction demand. Some notable projects include the relocation of Singapore Science Centre, the Toa Payoh Integrated Development and a new integrated hospital in Bedok.

Government spending to spur public demand. In May 21, Singapore’s government passed the Significant Infrastructure Government Loan Act (Singa) that would help boost infrastructure spending in Singapore. Under the bill, the government will borrow up to S$90b through issuing bonds to help finance long-term infrastructure that would last for 50 years. Some of the infrastructure projects include the new MRT lines such as the Cross Island and Jurong Regional Lines. The bill is expected to finance the huge upfront costs of upcoming projects along with an expected pipeline of projects for the next 15 years. With strong support for infrastructure spending from the government, we reckon construction companies, such as BRC, to benefit from the commencement of these infrastructure projects.

Supply of BTO flats to increase. In spite of the pandemic, Build-to-Order (BTO) projects continue to be favourable for BRC, with the total number of BTO flat units increasing from 16,800 in 2020 to 17,000 in 2021. The government has mentioned that there are no plans to reduce the supply of BTO units in 2022, and expects this to be similar to, or above 2021’s total supply. Thus, this will help support demand for BRC’s reinforced steel, which is an integral component for the construction of BTO flats.

Endemic transition to improve labour supply. With Singapore’s fully vaccinated rate reaching 88%, Singapore’s transition to endemic living would help boost worksite activity as more construction workers return in the absence of lockdown restrictions.

EARNINGS REVISION/RISK

Cut FY22-23 earnings forecasts while adding FY24 estimates. We have cut our FY22 and FY23 net profit estimates to S$52.3m (S$56.7m) and S$59.2m (S$62.0m), down 7.9% and 4.5% respectively. The reduction in net profit is on the back of persistent labour shortage, which we expect to return to pre-COVID-19 levels in 3QFY22/4QFY22.

VALUATION/RECOMMENDATION

Maintain BUY with a higher target price of S$1.91 (S$1.76), based on 8.8x FY22F PE. This is pegged to -0.5SD of BRC’s long-term average (excluding outliers of >2SD at 25x). The exclusion is primarily from the high base in FY16-17. Key re-rating catalysts would be the discovery of a new Omicron vaccine and the complete removal of COVID-19 restrictions.

Key risks: Credit risk from smaller construction players.

SHARE PRICE CATALYST

• Faster-than-expected recovery in construction activities.
• More public housing projects awarded.
• Relaxation of foreign labour restrictions.