Jovi Ho Tue, May 31, 2022
A rebound in construction activities helped BRC Asia Holdings beat expectations in 1HFY2022, says SAC Capital analyst Peggy Mak.
Revenue grew 61.0% y-o-y to $793.3 million, and net profit grew 108% to $39.8 million, buoyed by higher steel prices (up about 35%) and volume (up about 25%).
In a May 25 note, Mak is maintaining “hold” on BRC Asia Holdings with a target price of $1.92.
“Sales in the Singapore market accounted for 85.5% of revenue, as BRC remains a major supplier of rebars for the construction sector. As at end-March, it has an order backlog of $1 billion,” says Mak.
Gross margin rose from 8.1% in 1HFY2021 to 8.7% in 1HFY2022, with a $1.8 million reversal of provision for onerous contracts, versus $28.9 million provision in the prior year.
BRC set aside $42.5 million to cover undelivered orders that quoted steel price at below current market price. Excluding these provisions, gross margin fell from 15.7% in 1HFY2021 to 9.6% in 1HFY2022, as cost of raw materials rose in tandem with average selling price (ASP).
Meanwhile, steel rebar futures are heading lower from May, says Mak.
Rebar prices surged by about 30% from late-February when the war in Ukraine erupted, as steel exports from Russia and Ukraine were cut.
Since early May, prices have eased by 17% to US$790/tonne. The decline in steel prices could bring about an earlier reversion of the $42.5 million in provisions for onerous contracts, says Mak, an upside risk to earnings projections.
“We are, however, more concerned about the impact of a price decline. The Building and Construction Association (BCA) stipulates a monthly material price index for implementation of fluctuation clauses in supply contracts for rebars for public sector projects,” says Mak.
She adds: “While this index has so far tracked the market price closely, there is a risk, albeit small, if rebars market price fall sharply and come in below the prices that BRC has contracted to buy. Net gearing has improved to 0.8x (from 1.17x at September 2021) with lower net debt to ebitda of 2.6x (September 2021: 4.3x).”
Mak believes debt will rise as working capital requirements grow with higher revenue. “The company generates strong 1HFY2022 annualised return on invested capital (ROIC) of 27.4%, which cushions the risk of rising interest rates.”
“We raised our FY2022E and FY2023E revenue by 5.6% and 2.7%, and net profit by 10.9% and 6.2%, respectively, to reflect higher order deliveries,” she adds.
As at 3.10pm, shares in BRC Asia are trading 2 cents lower, or 1.13%, at $1.75.
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