A strong start to FY22
? BRC’s 1Q22 net profit of S$13.3m (+38.8% yoy) was above expectations. We remain bullish on construction recovery in 2022F as labour shortage eases.
? Construction output is set to reach a 6-year high in 2022F, according to BCA, supported by steady construction demand and work backlogs since 2020.
? BRC is our sector’s top pick. We see it as a key beneficiary of construction activity recovery. It also offers a high dividend yield of 6.7%. Reiterate Add.
1QFY9/22 results above expectations
? BRC Asia announced a 1QFY9/22 net profit of S$13.3m (+38.8% yoy), coming in at 25.9% of our FY22F forecast. We deem the results as above expectations, as 1H is typically a seasonally weaker period, given the rainy season and festive periods.
BRC’s orderbook remains healthy at S$1.3bn.
? We also noticed a rapid deleveraging of BRC’s balance sheet during the quarter – net gearing stood at 49% as of end-1QFY22 (vs. end-FY21: 117%). As majority of BRC’s outstanding loans are trade facilities to finance the procurement of steel raw materials to fulfil its existing sales orderbook, we do expect the net gearing ratio to fluctuate from quarter to quarter, but the lower gearing ratio reported for 1Q22 should ease some investors’ concerns over the capital structure of the group.
Maintaining our bullish outlook on construction recovery in 2022F
? Singapore’s construction output has remained at 26% below pre-Covid-19 levels in 4QCY21, as activities continued to be weighed down by labour shortages due to border restrictions on the entry of migrant workers. We believe the situation will be gradually alleviated towards 2HCY22F, with the government’s commitment to press on to bring in much-needed migrant workers.
? The Building and Construction Authority (BCA) projected total nominal construction output to rise to S$29bn-32bn in 2022F (+12-23% yoy), supported by a steady level of construction demand and the backlog of remaining workloads that were affected by the pandemic since 2020. 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). With a c.60% market share in the reinforced steel industry, BRC will be a key beneficiary of construction activity recovery, in our view. We currently project a conservative 10% net profit growth in FY22F for BRC to S$51.5m.
BRC a key beneficiary; reiterate Add and TP of S$2.10
? Reiterate Add and a 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 cashflow generation, we believe BRC can sustain its strong dividend yield of 6.7% (assume a 60% dividend payout ratio). Re-rating catalysts include a faster-than-expected pace of recovery in Singapore construction activities; downside risks include counterparty credit risks, given the weakened financial health of the industry due to the Covid-19 pandemic.