Recovery intact despite macro challenges
? We hosted BRC, PanU and Vicplas for a panel discussion last Friday. They
were cautiously optimistic on further construction sector recovery in CY22F.
? With their market leadership positions, BRC and PanU have stronger pricing
power to pass on the higher costs and upload margins, in our view.
? Reiterate sector Overweight. Our top pick is BRC Asia for its relatively
attractive valuation and higher dividend yield.
Construction activity recovery in Singapore remains intact
On 29 Apr, we hosted the management of three building material players (BRC Asia,
Pan-United, and Vicplas) to discuss the latest dynamics within the Singapore construction
industry. Despite macro challenges, the companies appear to be cautiously optimistic of
further construction activity recovery in 2022F, especially given the steady demand for
new construction projects, coupled with the backlog of remaining workloads affected by
the pandemic since 2020, further helped by the easing of the migrant worker shortage
situation in coming quarters. Aside from the rollout of new infrastructure projects (Cross
Island MRT Line, Tuas Terminal), the building material players also expect tailwinds from
a further ramp-up in public housing supply, which could bode well for demand (BRC:
reinforced steel solutions, PanU: ready-mix concrete, Vicplas: uPVC pipes).
Costs are rising, but generally being passed on
Higher commodity, freight and energy costs have led to higher input costs for building
material players YTD. Generally, they have been able to pass on the higher costs, albeit
potentially at a moderate pace to preserve long-term customer relationships. We believe
BRC and PanU have stronger pricing power due to their market leadership positions in
respective sub-segments. Building material players highlighted their risk management
policies to manage exposures amid volatile prices – for example, Vicplas frequent
engages with customers to better sense volume requirement to facilitate procurement,
while BRC dynamic hedges its orderbook on a pooled basis to secure margins.
Supply chain resiliency has improved compared to 2020
Thanks to diversified resources and supplies, building material players have been able to
tide through multiple supply chain disruptions over the past 2 years. They continue to
take steps to increase supply chain resiliency and cost efficiency. For example, PanU
was able to leverage on its slag grinding plant in Johor to ensure better supply of raw
materials amidst disruptions; it has further improved supply chain efficiency from
continued optimisation of in-house digital logistics platform (AiR). Meanwhile, Vicplas is
carrying a higher level of inventories to minimise risks from potential supply disruptions.
Bringing environmental sustainability into the construction sector
All three companies are beneficiaries of the built environment sector’s embracing of
green construction. PanU offers over 150 concrete products nationally certified as green
products and offers PanU CarbonCure concrete which involves carbon capture and
utilisation (CCU) technology that injects mineralised carbon dioxide into wet concrete
during mixing to reduce embodied carbon emissions. BRC’s reinforced steel solutions are
essentially a substitute for labour-intensive and unproductive use of loose reinforcement
bars handled on site. Meanwhile, Vicplas reformulated all its plastic product lines to be
heavy metal free since 2016. Vicplas was the first uPVC pipe producer in Singapore to
receive one Green Check Mark certification from the Singapore Green Building Council
(SGBC) and is currently pursuing its second and third Check Marks from the SGBC.
Credit risk continues to be a key concern
Credit risk remains a key concern for the building material players, as Covid-19 impacts
over the past 2 years have worsened the financial health of numerous industry players,
which could limit their ability to ride on the current recovery trend. All three players are
closely monitoring cash collection and evaluating customers’ credit risks. They also
generally have trade insurance in place to limit credit exposures