Healthy industry fundamentals
- The BCA expects both 2024F construction demand (+4% yoy from midpoint) and output (+2% yoy from midpoint) to reach the highest level since 2015.
- We expect positive sector outlook for 2024F, on the back of elevated industry orderbooks, robust construction demand, improving site productivity.
- Reiterate sector Overweight. BRC is our sector top pick given its strong 9% dividend yield.
BCA expects construction output to further improve in 2024F
The Building and Construction Authority (BCA) today (15 Jan) announced that it expects total nominal construction output (as measured by progress payments) to rise to S$34bn- 37bn in 2024F (2023F: S$34.8bn), the highest level since 2015. This aligns with our view that construction activities should continue to improve in 2024F, with: 1) healthy construction demand, 2) elevated industry orderbooks, and 3) productivity improvements (recall that Singapore’s construction sector activity levels were negatively impacted by the government’s Heightened Safety Alert for the first 5 months of 2023).
2024-28F construction demand forecast lifted by mega projects
BCA forecasts total construction demand (measured by contracts awarded) in 2024F at S$32bn-38bn (2023p: S$33.8bn), the highest level since 2014. Notable developments include expansion of Integrated Resorts, continued roll-out of infrastructure development, such as Cross Island MRT Line, as well as public housing. For the medium term (2025- 2028F), BCA now expects construction demand to remain elevated at S$31bn-38bn (2009- 2023 average: S$29.8bn). We note that this represents an uplift from the S$25bn-32bn forecast put out by BCA last year, largely due to contributions from the expansion of Integrated Resorts and the inclusion of Changi Airport Terminal 5. BCA also revised upwards its forecast for construction demand by the private sector for the medium term, from S$11bn-14bn previously to S$12bn-15bn.
Building material players to benefit
We believe BCA’s latest projections reinforce our view of continued strength in Singapore’s construction activities ahead, which could benefit all three building material companies under our coverage (BRC, PANU, HLA). Our channel checks indicate that industry orderbooks currently remain c.9% above pre-Covid levels as of end-Dec 23, presenting healthy near-term revenue visibility for building material players as contractors continue to execute on their backlog while orders are being replenished, in our view.
Reiterate sector overweight; BRC remains our top pick
Reiterate sector Overweight on healthy industry fundamentals and attractive valuation. Our top pick is BRC (BRC SP, TP: S$2.30, CP: S$1.82), given its undemanding valuation of c.6x CY25F P/E (industry average: 7x) and dividend yield of c.9% (industry average: 7%). Re-rating catalysts include continued healthy construction demand in Singapore and faster improvement in labour productivity. Downside risks include inability to pass on business costs resulting in pressured margins, and counterparty credit risks.
