Riding on strong recovery of construction activity
- Higher construction output to lift sales volumes following easing of labour constraints and pending projects
- Margin improves from FY21 low due to cost synergies from higher volumes and stronger bargaining power
- Market leader with a market share of 60%-70% after the acquisition of Lee Metal
- Initiate coverage with BUY, TP of S$2.40
Initiate with BUY, TP S$2.40 for 37% upside. We believe our BUY recommendation is justified, given the recovery of the construction sector, improvement in the company’s margins, its dominant market position, attractive dividend yield, and undemanding valuation.
(1) En route to pre-pandemic levels; BRC’s revenue to surge 40% on increased construction activity
Higher construction output to lift BRC’s sales volumes by 16%. The Building and Construction Authority (BCA) estimates 2022 construction output to be between S$29-32bn, roughly 12%-24% higher than 2021. We think that this can be ascribed to construction recovery amidst the pent-up backlog from delayed projects. In general, BRC’s sales tie in with total construction output – also known as construction certified progress payments. In 2020, when construction output declined by 21.9%, BRC’s sales also dipped by 32.9%. Amidst the economic recovery in 2021, the construction contracts awarded increased by 16.1%. The recovery from a low base led to a growth of more than 90% in BRC’s sales. From our analysis, we derive that higher construction output will spur demand for steel reinforcement solutions, which should lead to larger sales volumes. We have estimated a 16% increase in sales volume, and this would translate into revenue growth of 40%.
Longer term outlook positive for BRC, as healthy construction demand in 2023-2026 backs construction output. We have forecasted sales volume increases of 16%/7%/3% for FY22/FY23/FY24 given the healthy construction demand. The BCA expects construction demand to be between S$25-32bn per year between 2023-2026. The public sector will be supported by a strong pipeline of projects including public housing developments, the Cross Island Line (Phases 2 & 3), the redevelopment of Alexandra Hospital, a new integrated hospital in Bedok, and the Toa Payoh Integrated Development project. In addition, private sector construction demand is expected to “remain steady” on the back of Singapore’s strong economic fundamentals. We remain optimistic that the healthy construction demand will back construction output, driving steady demand for BRC’s steel reinforcement solutions. Therefore, sales volume is poised on an uptrend through the forecasted period.
Easing of labour constraints to clear backlog, thereby boosting construction activity. Despite growing construction demand and increasing business activity, estimates by the Ministry of Trade and Industry in Singapore (MTI) show that the value addition by the construction sector is 25.3% below pre-pandemic levels as of the first quarter of 2022. Nonetheless, we expect labour constraints to improve upon the removal of sectoral COVID-19 measures for the construction sector since March 2022. Currently, employers no longer need to cohort workers, stagger the use of share facilities, or implement group size limits and safe distancing measures. The Singapore Government has also relaxed border restrictions, resulting in improved labour supply. With improving labour supply, we are of the view that construction activity and construction output will rebound to pre-pandemic levels, translating into higher demand for BRC’s steel reinforcement solutions.