Highlighted Companies
BRC Asia Ltd ADD, TP S$2.50, S$1.65 close
BRC is our top pick for the sector. Our TP of S$2.50 is based on 1.74x CY22F P/BV. Valuations are currently attractive at 5.7x CY23F P/E. We also believe BRC potentially offers a dividend yield of c.10% given strong free cash flow generation.
Pan-United Corp Ltd ADD, TP S$0.57, S$0.43 close
Our TP of S$0.57 is based on 6.6x CY23F EV/EBITDA, a c.10% discount to peers on account of its size. Pan-United currently trades at 10.5x CY23F P/E, with a dividend yield of 5.6%.
Labour situation improving
- Sector employment further improved in 2Q22 (+14% yoy), almost back to pre-Covid levels (end-Dec 19) as contractors accelerate project executions.
- We believe activities should remain supported medium-term by elevated order books, resumption of major projects and higher public housing supply.
- Reiterate sector Overweight. BRC is our top sector pick on attractive valuations and higher dividend yield (c.10%).
Improving labour situation should point to a better 2H22F
Construction sector employment in Singapore rose 14% yoy in 2Q22, forming c.99% of end-Dec 19 levels, as border controls were significantly relaxed in Apr 22. In addition, average weekly paid overtime hours worked by construction employees in 2Q22 rose 7% yoy, supporting our thesis of contractors accelerating project execution to make up for lost time. While the sector still faces some transient productivity issues (time needed to train newer workers) and safety time-outs (from increased workplace accidents) in 3Q22F, we believe these issues should gradually be alleviated in the coming quarters.
Construction activities anchored by resilient public sector projects
While recent macroeconomic headwinds and elevated construction costs could dampen investment appetite from the private sector (c.40% of annual construction demand), we believe construction activities should remain supported in the medium term by:
1) Elevated order books. The combined order book (as of end-Jun 22) of 19 Singapore-listed construction firms remained elevated at c.20% above the 7- year (FY15-21) historical average.
2) Resumption of major projects. Previously-shelved projects, including Terminal 5 (c.S$10bn) and the integrated resorts expansion (MBS and RWS, c.S$4.5bn each), have since resumed progressively. These projects were not included in the Building and Construction Authority’s (BCA) forecasts; based on indicative timelines, we believe these three projects could add c.10% to the midpoint of BCA’s initial 2023-26F construction demand projections.
3) Continued ramp-up in public housing supply. To meet stronger housing demand, Singapore aims to increase its Build-To-Order (BTO) flat supply to c.21k per annum over 2022-25F (2019: 14.6k, 2021: 17.1k). BCA estimates public housing to account for c.15% of 2022F construction demand.
Reiterate sector Overweight; BRC is our top sector pick
We retain our Overweight call on the sector as we expect both BRC and Pan-United to benefit from ramp-up in project execution and healthy profit spreads. Our top sector pick is BRC given its relatively attractive valuation (c.6x CY23F P/E) and higher dividend yield of c.10%. Key re-rating catalysts include faster improvement in labour productivity and robust construction demand. Downside risks include counterparty credit risks.
