A key beneficiary of sector recovery
? BCA projects construction output to rise to S$29bn-32bn in 2022F (+12-23% yoy), a 6-year high. Steel rebar demand is forecast to grow 11-33% yoy.
? We expect construction activities to improve as the labour shortage situation improves; builders could also rush to fulfil outstanding contracts.
? BRC is our sector top pick. We see it as a key beneficiary of construction activity recovery. It also offers a high dividend yield of 7.6%. Reiterate Add.
BCA projects construction output in 2022F to hit 6-year high
? The Building and Construction Authority (BCA) today announced that it projects total nominal construction output (progress payment) to rise to S$29bn-32bn in 2022F, representing a 12-23% yoy increase from S$26bn in 2021, supported by a steady level of construction demand and the backlog of remaining workloads that were affected by the pandemic since 2020. This marks the highest level of construction output since 2016.
? BCA projects demand for building materials to increase correspondingly – steel rebar demand is forecast to grow to 1.0m-1.2m tonnes in 2022F (11-33% yoy growth vs. 2021’s 0.9m tonnes). With a c.60% market share in the reinforced steel industry, BRC will be a key beneficiary of construction activity recovery, in our view.
Construction activities to improve as foreign workers return
? Singapore’s construction output has remained at 26% below pre-Covid-19 levels in 4QCY21. In our view, the key bottleneck to construction activity recovery in 2022F is the shortage of foreign labour. Earlier this month, Prime Minister Lee Hsien Loong said in his New Year message that the government will “press on to bring in much needed migrant workers”; with easing border restrictions, we expect the labour shortage situation to be gradually alleviated towards 2HCY22F.
? According to BRC, Covid-19 disruptions are also increasingly minimised, with the workforce getting to grips with the new normal. BRC also expects the work pace to pick up in the coming quarters as builders rush to fulfil the sizeable number of outstanding construction contracts. We currently project a conservative 10% net profit growth in FY22F for BRC to S$51.5m.
BRC to benefit as the market leader in supply of reinforced steel
? Reiterate Add and TP of S$2.10, based on 1.53x CY22F P/BV (GGM: ROE 14.6%, cost of equity 9.7%, terminal growth 0.5%). With strong free cash flow generation, we believe BRC can sustain its strong dividend yield of 7.6% (assume 60% dividend payout ratio). Re-rating catalysts include faster than-expected pace of recovery in Singapore construction activities; downside risks include counterparty credit risks given weakened financial health of the industry due to the Covid-19 pandemic.