Felicia Tan Wed, Jun 08, 2022
DBS Group Research has initiated “buy” on BRC Asia Limited with a target price of $2.40.
The target price is based on a one year forward P/E of 8.2x, representing a discount of 15% to the company’s five-year historical mean, in view of the current global economic uncertainties, writes analyst Lee Eun Young in her June 8 report.
Lee’s recommendation comes on the back of the strong recovery of the construction sector, which is en-route to its pre-pandemic levels.
To be sure, the Building and Construction Authority (BCA) has estimated Singapore’s construction output for 2022 to be between $29 billion to $32 billion, which is around 12% to 24% higher than 2021’s output.
“In general, BRC’s sales tie in with total construction output – also known as construction certified progress payments,” writes Lee.
“From our analysis, we derive that higher construction output will spur demand for steel reinforcement solutions, which should lead to larger sales volumes,” she adds.
According to Lee’s estimates, BRC’s sales volume should increase by around 16% in 2022, boosting revenue growth by 40% in the same year.
In addition, Lee is positive on BRC’s longer-term prospects as 2023 to 2026 is expected to see healthy demand for construction, which could, in turn, back construction output.
The BCA is estimating construction demand to be between $25 billion to $32 billion per year between 2023 to 2026.
The public sector will also be supported by a strong pipeline of projects, which include 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.
Construction in the private sector is also expected to “remain steady” on the back of Singapore’s strong economic fundamentals.
On this, Lee has forecasted BRC to log sales volume increases of 16%, 7% and 3% for the FY2022, FY2023 and FY2024 respectively given the healthy construction demand.
“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,” she writes.
Margins to improve
Lee also expects BRC Asia to see stronger margins from the lows seen in the FY2021 due to the stronger growth in sales volumes.
The higher market share enjoyed by BRC Asia after its acquisition of Lee Metal will also allow the company to enjoy higher bargaining power for the purchase of rebars, says the analyst.
“Gross margins have been on an uptrend as a result of cost synergies associated with bulk raw material purchases and better pricing power,” she writes.
“We believe that the stronger pricing power on the back of higher sales volumes will translate into cost synergies, leading to an improvement in margins from 7.0% in FY21 to 8.7% through the forecasted period,” she adds.
Dominant market position well-positioned to ride industry growth
Finally, Lee sees BRC’s large market share as an advantage for the company. In her view, BRC’s market share of 60% to 70% enables the company to be “well-positioned” to ride the growth of the industry.
“According to our checks, customers with big projects are more inclined to choose BRC because of its ability to handle large scale projects, which places the group in a good position to benefit from the upcoming ramp up of HDB projects, and other major projects such as the Changi Airport Terminal 5 and expansion of the integrated resorts,” she says.
On the flip side, key risks, in her view, include disruptions in construction activities, prolonged labour supply issues, huge swings in steel prices and cautious sentiment from developers.
Shares in BRC closed 7 cents higher or 4% up at $1.82 on June 8.