UOB Kay Hian analysts Llelleythan Tan Yi Rong and Heid Mo in their April 15 note have kept their " buy" call for BRC Asia BEC 0.51% . 

 

As the steel supplier is seen to enjoy steady earnings growth thanks to an improving construction sector coupled with a generous dividend yield of 9%, they have raised their target price from $2.07 to $2.42.

 

BRC Asia' s 1QFY2024 earnings of $17.1 million, up 46.5% y-o-y, came in above the expectations of Tan and Mo. Revenue in the same period was up 17% y-o-y, despite a seasonally slow quarter.

 

" The strong top and bottom-line growths were largely due to a low base in 1QFY2023 from Singapore&rsquo s Heightened Safety period depressing delivery volumes while also driven by the ongoing recovery in domestic construction demand," reason the analysts, referring to the months when the tempo of construction activities slowed because of a spate of accidents.

 

Even so, BRC Asia was able to enjoy better margins which can be attributed to higher volumes and utilisation rates. Certain reversals of provisions for onerous contracts made previously helped as well.

 

The analysts point out that BRC Asia was able to maintain its dominant market share, as indicated by its order book of around $1.3 billion as of end of March, versus the preceding quarter ended December. 

 

" We expect the group to deliver half of its current order book in the next 3-4 quarters as domestic construction activity continues to recover," state Tan and Mo.

 

Citing government statistics, the analysts point out the construction demand in Singapore this year will reach up to $38 billion, exceeding last year' s $33.8 billion.

 

Growth is driven by the strong pipeline of new public housing while long-term growth will be underpinned by big infrastructure projects such as Changi Airport Terminal 5, Tuas Mega Port and the Cross Island MRT, the analysts say.

 

They have raised their FY2024 earnings estimates from $76.9 million to $88.7 million. They now see earnings for FY2025 and FY2026 to reach $98.5 million and $102.2 million, up from $84.3 million and $87 million respectively.

 

Along with the higher earnings projections, they have accorded a slightly higher valuation multiple of 7.5 times earnings, up from 7 times, to derive the higher target price of $2.42 from $2.07.

 

" In our view, favourable tailwinds, expected earnings growth, along with BRC' s attractive 9% dividend yield would help support share price performance in 2024," write Tan and Mo.

MAINBOARD-LISTED BRC Asia : BEC 0%reported a 46.5 per cent increase in net profit to S$17.1 million for its first quarter ended Dec 31, 2023, from S$11.7 million in the same period a year before.

 

The steel manufacturing and solutions provider announced the results in a business update on Tuesday (Feb 6).

 

Revenue for Q1 increased 17 per cent to S$399.2 million, from S$341.3 million in the previous year.

 

As at Dec 31, 2023, the company&rsquo s order book stood at around S$1.3 billion. Projects in that book have a duration of up to five years, although that may be subject to change, it added.

 

The company said that upbeat forecasts for construction demand in Singapore &ldquo bode well&rdquo for the local reinforcing steel industry in the short-to-medium term, despite concerns about credit risk and a heightened inflationary environment.

 

It cited Building and Construction Authority (BCA) data from a briefing on Jan 15, 2024, showing that construction demand in 2023 reached S$33.8 billion, exceeding the authority&rsquo s estimate of S$27 billion to S$32 billion.

 

This was a result of increasing tender prices, the expediting of construction awards for several private residential projects, and more public housing projects.

 

The company also referenced additional BCA forecasts which expect total construction demand for 2024 to be between S$32 billion and S$38 billion, as well as steady improvement in the medium term.

 

BRC Asia : BEC 0% has accepted a binding offer to sell its shareholding interest in Pristine Islands Investment, an investment holding company that engages in hotel and resort operations and airport management in the Maldives.

 

Under the binding offer, the purchaser E Street Capital will pay BRC Asia up to US$14 million, comprising US$12.7 million for a sale loan and US$1.3 million for the sale shares in Pristine, said BRC Asia on Tuesday (Jan 2).

 

As at the date of this announcement, the total paid-up capital of Pristine is around US$10 million. The 1.7 million ordinary shares to be disposed by BRC Asia represent 17 per cent of the total issued share capital.

 

The remaining Pristine shares are held by Keong Hong Construction, Sansui Holding and L3 Development, with shareholding interests of 49 per cent, 17 per cent and 17 per cent, respectively, in Pristine, according to the bourse filing.

 

BRC Asia said that the shareholding disposal &ldquo will be in the best interests of the company in view of Pristine&rsquo s historical performance and financial position&rdquo .

 

&ldquo Moreover, Pristine&rsquo s business is unrelated to the group&rsquo s core business and, in any case, the company has little to no control as a 17 per cent shareholder.&rdquo

 

The steel prefabrication solutions provider also noted that the disposal will allow the company to exit its investment related to the potential disputes among Pristine&rsquo s shareholders, as well as its management, regarding the parties&rsquo obligations.

 

Following the completion of the disposal, net cash proceeds, after deducting expenses, of about S$18.5 million will be used for working capital purposes, the company said.

UOB Kay Hian upgrades BRC Asia to ' buy' , citing healthy outlook an attractive yield

 

UOB Kay Hian, citing an improving outlook and an attractive yield of 10%, has upgraded BRC Asia BEC 1.15% to ' buy' along with a higher target price of $2.07, from $1.73.

 

Analysts Llelleythan Tan and Heidi Mo point out that the steel supplier' s FY2023 earnings for the year ended Sept was ahead of their projections, if not for a one-off impairment on a joint venture.

 

Even so, BRC Asia declared yet another special dividend, bringing the total paid for FY2023 to 16 cents per share, equivalent to a payout ratio of 58%. For FY2022, the company paid 18 cents per share in total.

 

" As a recap, the group does not have a formal dividend policy but we opine that it would be able to sustain its historical average 60% payout ratio in the current FY2024, backed by its strong operating cash flows. Based on our estimates, this implies an attractive FY24 dividend yield of around 10%," state Tan and Mo in their Dec 12 note.

 

As at end of FY2023, BRC Asia has reduced its net gearing to 46% from 76% a year ago, thanks to its strong operating cash flows. However, no thanks to higher rates, its interest coverage ratio worsened to 8x instead of 16x. " Moving forward, we expect BRC to continue to pare down its debt levels," the analysts say.

 

Nonetheless, BRC Asia enjoys a better outlook thanks to strong demand from the large number of public housing projects in the pipeline, as well as other upcoming infrastructure projects including Changi Airport Terminal 5 and the subsequent phases of the Tuas Mega Port over the longer term. As at the end of FY2023, its order book was worth $1.3 billion.

 

While Tan and Mo tweaked their earnings projection for FY2024 and FY2025, they have raised their estimate for FY2026.

 

Along with the higher earnings, they' ve derived their new target price of $2.07 which is based on 7x FY2024 earnings, which is pegged to 0.5SD of its long-term average PE. 

 

" In our view, BRC' s attractive 10% dividend yield would help support share price performance moving forward," they add.

 

Analysts from DBS Group Research have kept their " buy" call but with a raised target price of $2 from $1.89 previously for steel supplier BRC Asia BEC 0.00% , given its steady outlook and leading market position.

 

Given the company' s " dominant" market share of 60%-70%, it is seen as 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," write analysts Lee Eun Young and Amanda Tan in their Dec 6 note.

 

" This 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."

 

Citing official projections, construction demand is seen to be held at $25 billion to $32 billion per year between 2024 and 2027.

 

" Despite external headwinds, Singapore&rsquo s healthy economic fundamentals should continue to attract investments. Hence, private sector construction demand should likely remain stable," the analysts say.

 

" With steady construction demand, we expect construction output and consequently demand for BRC&rsquo s solutions to remain firm in the medium term," they note, adding that key projects in the pipeline include the Cross Island MRT line and Downtown Line extension.

 

BRC Asia' s " strong" order book of $1.3 billion and accelerating site progress will be key drivers for the current FY2024.

 

Over the past year, construction tempo in Singapore slowed because of a slew of fatal accidents, to observe the so-called " heightened safety period" , which ended in May.

 

Since then, the company has already observed a general acceleration in the progress of local construction post the HSP. 

 

" However, intermittent periods of downtime due to safety concerns and resource constraints will remain. Additionally, higher electricity, manpower, and financing costs could exert some pressure on margins in the construction industry, which may eventually flow through to BRC," according to Lee and Tan.

 

Their higher target price of $2 is premised on a new valuation multiple of 8x which is slightly above +0.5SD of the historical mean. 

 

Separately, Peggy Mak of PhillipCapital has kept her " buy" call and $1.99 target price on BRC Asia.

 

In her Dec 6 note, Mak expects that the company' s average selling price has bottomed and will remain stable. She estimates demand volume to increase by 20% this current FY2024 in line with a pick up in construction activities. 

 

BRC Asia has announced that its replacement of a steel-supply contract with a cheaper deal amid sliding steel prices has enabled it to save at least S$25 per tonne &ndash even after taking into account the S$2.1 million it had to pay to compensate the first supplier.

 

In its regulatory filing in response to queries from the Singapore Exchange (SGX) on Monday (Dec 4), the mainboard-listed steel reinforcement solutions provider described the settlement sum to Shanghai Emetal Hong Energy as &ldquo commercially justifiable&rdquo .

 

BRC also stated that the move did not prejudice the interests of the company and its minority shareholders.

 

Shanghai Emetal Hong Energy is an associate of BRC&rsquo s controlling shareholder.

 

The price per tonne for the steel deformed bars in the purchase contract with Shanghai Emetal Hong Energy was based on the prevailing market price, but the price of steel bars fell substantially in the six months before the scheduled delivery by October.

 

BRC said: &ldquo Such market conditions presented the company with an opportunity to negotiate more advantageous terms with another supplier.&rdquo

 

The S$2.1 million compensation was &ldquo outweighed&rdquo by the cost savings of at least S$25 per tonne eventually achieved by the company as a result, without compromising the reliability of its supply chain, added BRC.

 

The aggregate value of all transactions entered into with Shanghai Emetal Hong Energy in FY2023 (including the settlement amount) totalled approximately S$2.1 million, representing less than 3 per cent of the group&rsquo s audited net tangible assets for FY2022, BRC stated.

 

Thus, it did not require shareholder approval based on listing rules.

 

Following better-than-expected FY2023 earnings, CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan have maintained their " add" call on steel supplier BRC Asia and have also raised their target price for this counter to $2.30 from $2.20.

 

The company plans to pay a special dividend of 5.5 cents on top of a final dividend of 5.5 cents, bringing FY2023 total to 16 cents, or a yield of 10%.

 

" We see BRC Asia benefiting from a favourable construction sector outlook in 2024 driven by elevated industry order books and robust projects pipeline," the analysts write in their Nov 22 note.

 

Their $2.30 target price is based on an " undemanding" 6x FY2024 earnings, with support from the dividend of 10%.

 

In 4QFY23 ended Sept 30, the company booked a one-off   $5.4 million impairment charge for its 17%-owned Maldives associate.

 

That aside, thanks to better margins, BRC&rsquo s core earnings for 4QFY2023 was up 8% y-o-y and up 43% q-o-q to $32 million, beating expectations.

 

For this coming year, BRC Asia BEC 4.85% is seen to continue to capitalise on robust construction activities this coming year.

 

The CGS-CIMB analysts note that in September, construction output in Singapore,   measured by progress payments, hit a multi-year high.

 

" We think is a good indication that industry players are starting to meaningfully execute their elevated order books, which are at 9% above pre-Covid levels as at end-Sept.

 

" We see a robust pipeline of projects in 2024 from the public residential, specifically, the ramp-up of built-to-order flats, and infrastructure ones, such as railway projects, which we think BRC will be able to capitalise on given its dominant market share in Singapore' s reinforced steel industry," the analysts add.

 

Potential re-rating catalysts, according to CGS-CIMB, include better improvements in labour productivity driving a quicker recovery in construction activities and boosting BRC&rsquo s sales volumes. 

 

On the other hand, downside risks will include counterparty credit risks, and weaker construction demand due to an economic slowdown negatively impacting BRC&rsquo s sales volumes.

 

DBS Group Research is similarly positive on this stock, with a " buy" call and $1.89 target price, but warns that some potential hurdles ahead.

 

Earlier this year, the so-called heightened safety period (HSP) - which refers to a deliberate slower pace of construction activities following a spate of fatal accidents - has ended.

 

From the perspective of DBS, that' s a key overhang over BRC Asia that has been removed, as that means worksites can resume at a quicker pace.

 

" BRC has already observed a general acceleration in the progress of local construction progress post-HSP but sees intermittent periods of downtime due to safety concerns and resource constraints," warns DBS.

 

" Additionally, higher electricity, manpower, and financing costs could exert some pressure on margins in the construction industry which may eventually flow through to BRC," adds DBS.

 

STEEL solutions provider BRC Asia posted a 2 per cent fall in net profit to S$49.5 million for its second half ended Sep 30, 2023, from S$50.4 million in the same period a year earlier.

 

The company saw a weaker performance in FY2023 compared with record results in FY2022. But it had been on a steady recovery path over the last six months, with gradually normalising activity levels of local construction projects, BRC Asia said on Tuesday (Nov 21).

 

Earnings per share stood at 18.05 Singapore cents for the half-year period, down from 18.36 cents the previous year.

 

Revenue for H2 was largely flat at S$909.9 million, from S$905.9 million a year earlier.

 

For the full year ended Sep 30, 2023, net profit fell 16 per cent to S$75.7 million while revenue fell 4 per cent to S$1.6 billion.

 

In FY2023, the company navigated a temporary slowdown in the local construction industry resulting from project safety timeouts, and also incurred losses and impairment of S$7.8 million in an investment in a Maldives resort, it said.

 

While it saw a lower contractual offtake and market-driven lower selling prices in the first half, the decrease was partially offset by improved sales volume in H2.

 

On the back of improving industry prospects and solid company fundamentals, the company is proposing a final dividend of 5.5 cents per share, and a special dividend of 5.5 cents per share, for the half-year period.

 

In comparison, BRC Asia declared a final dividend and special dividend of 6 cents per share each in the same period a year before.

 

The dividends proposed in H2 FY2023 brings the total dividend for FY2023 to 16 cents per share, representing a payout ratio of 58 per cent. The books closure date and payment date will be announced later.

 

Commenting on the company&rsquo s performance, BRC Asia chief executive Seah Kiin Peng noted that it still managed to secure the second-highest full-year net profit in its history on the back of a strong second half.

 

Looking ahead, the company expects the local construction sector will continue to recover.

 

It also expects to be well-positioned to fulfil its strong order book and seize additional growth opportunities in the foreseeable future.

 

In a business updat on Aug 4, steel supplier BRC Asia has reported earnings of $22.6 million for its 3QFY2023 ended June 30, versus $20.4 million recorded in the year earlier quarter.

 

Revenue in the same period was $459.9 million, down from $515.3 million reported for 3QFY2022.

 

This brings 9MFY2023 earnings to $48.8 million versus $60.2 million recorded for 9MFY2022.

 

As of June 30, the company has built up an order book of $1.34 billion, to be delivered for use in construction projects over the coming five years.

 

In his earnings commentary, CEO Seah Kiin Peng notes that construction activity has recovered following the slump during the pandemic.

 

Specifically, contracts awarded in the civil engineering and residential segments have largely returned to pre-Covid levels, led by a ramp up in public housing projects.

 

Seah notes that the strong local demand bodes well for demand for what BRC Asia sells.

 

However, he warns that " recent business failures of some main contractors" is a " stark reminder" that there are still uncompleted, loss-making projects from the pre-pandemic days and that " they continue to test the financial resilience and mettle of their builders severely."

 

" In this regard, BRC Asia will continue to exercise robust due diligence to minimise our exposure," adds Seah.

STEEL solutions provider BRC Asia : BEC +0.6% had a stronger bottom-line showing for its third fiscal quarter ended June. The company on Friday (Aug 4) posted a profit after tax of S$22.6 million for the quarter, up 10.9 per cent from S$20.4 million reported in the year-ago period.

 

This took the company&rsquo s nine-month net profit figure to S$48.8 million versus S$60.2 million last year, the company said in a business update. 

 

The stronger profit for Q3 came despite a 10.8 per cent drop in revenue to S$459.8 million. 

 

As at end-June, the company&rsquo s sales order book stood at about S$1.3 billion. It said the durations of the projects in its order book range up to five years, but may be subject to further changes. 

 

BRC Asia said that, following the Covid-19 pandemic, the local construction sector has been well-supported by strong demand.

 

It added that, according to the Building and Construction Authority (BCA), total construction demand for 2022 reached S$29.8 billion, which was within the authority&rsquo s earlier forecast of S$27 billion to S$32 billion, and similar to the S$29.9 billion recorded in 2021. 

 

For 2023, the BCA projects that total local construction demand would range between S$27 billion and S$32 billion, and the public sector is expected to make up 60 per cent of this demand. 

 

The company said that while strong local demand &ldquo bodes well&rdquo for steel reinforcers and BRC Asia, the recent business failures of some main contractors are &ldquo a stark reminder&rdquo that there are still loss-making construction projects that began before the pandemic and are still uncompleted. 

 

&ldquo (These projects) continue to test the financial resilience and mettle of their builders severely,&rdquo said the company. &ldquo In this regard, BRC Asia will continue to exercise robust due diligence to minimise our exposure.&rdquo

Anticipating &ldquo better times&rdquo ahead, DBS Group Research analyst Lee Eun Young has maintained her &ldquo buy&rdquo call for BRC Asia with a reduced target price of $1.89 from $2.22 previously.

 

In her report dated May 16, the analyst says BRC&rsquo s dominant market position in steel reinforcing solutions. &ldquo With a market share of 60% to 70%, BRC&rsquo s dominant market share implies that the group is well positioned to ride the growth of the industry,&rdquo says Lee.

 

According to Lee, 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 the expansion of integrated resorts.

 

Despite the long term stability that the analyst is projecting, BRC still faces a near term &ldquo overhang&rdquo . The company&rsquo s 1HFY2023 revenue declined 10% y-o-y to $717.1 million, below hers and consensus forecasts, while earnings fell 34% y-o-y on slower site progress and revenue mix, also below earlier estimates.

 

&ldquo Construction progress at sites was slower than expected in 1HFY2023, associated with safety reasons. In the near term, the heightened safety period from September 1, 2022 to May 31, 2023 could weigh on construction output, which affects the uptake of BRC&rsquo s solutions,&rdquo says Lee. &ldquo After the heightened safety period eases, an improving labour supply should help with the conversion of construction demand and backlog of construction spend.&rdquo

 

&ldquo Although the risk of an extension of the heightened safety period remains, our checks indicate that this is unlikely to continue. We thus look forward to a better 2HFY2023 and FY2024 which is backed by a strong order book and steady construction demand,&rdquo adds the analyst.

 

She believes BRC&rsquo s steady medium-term outlook bodes well for the company, whose construction backlog is still &ldquo substantial&rdquo , and expects construction demand of $25 billion to $32 billion per annum between 2024 and 2027.

 

Meanwhile, significant contributions to public sector demand will come from building projects and civil engineering works such as the Cross Island Line&rsquo s second and third phases and the Downtown Line extension.

 

&ldquo Despite recessionary risks, Singapore&rsquo s healthy economic fundamentals should continue to attract investments hence private sector construction demand should likely remain stable,&rdquo Lee explains. &ldquo With steady construction demand, we expect construction output and consequently demand for BRC&rsquo s solutions should remain firm in the medium term.&rdquo

 

Owing to the slower offtake of construction output and macroeconomic uncertainties, the analyst has revised her earnings estimates downwards by 16% and 12% for FY2023 and FY2024, with a lower target price of $1.89 from $2.22 previously.

 

Lee has also rolled forward our valuations to 8x FY2023 to FY2024 earnings, which is close to BRC&rsquo s historical mean.

STEEL solutions provider BRC Asia reported on Wednesday (May 10) a 34 per cent year-on-year decline in net profit for its first half on the back of lower revenue.

 

Net profit for the six months ended Mar 31, 2023 fell to S$26.2 million from S$39.8 million in the year-earlier period. On a per-share basis, earnings fell to S$0.0961 for H1 FY23, down from S$0.1465 for H1 FY22. An interim dividend of S$0.05 per share was declared, down from S$0.06 per share a year earlier.

 

Revenue fell 10 per cent on year in the first half to S$717.1 million, primarily attributable to lower contractual offtake due to slower site progress, BRC Asia said in the bourse filing.

 

Gross profit fell 23 per cent on year to S$52.7 million, with gross profit margin also declining to 7.4 per cent in H1 FY23 from 8.7 per cent in H1 FY22. The weaker margin was mainly due to lower sales volume of value-added steel products amid slower activity levels within the domestic construction industry.

 

Other income for H1 FY23 was S$3.7 million, up 42 per cent on year, mainly attributable to net foreign exchange gains, but this was partially offset by a reduction in credit insurance claims for bad debts and government grants. 

 

BRC Asia&rsquo s chief executive Seah Kiin Peng said the domestic construction sector was undergoing a &ldquo transitional phase&rdquo in the first quarter of 2023 where labour shortages were slightly easing and trained migrant workers gradually added to the workforce.

 

&ldquo The local construction sector continued to grow and expand in Q2 FY23 backed by a strong pipeline of construction projects. Even though these improvements have not been reflected directly in our H1 FY23 results, we do believe that these bode well for the overall recovery of the sector,&ldquo he said.

 

BRC Asia said it has seen a &ldquo moderate recovery&rdquo in project contractual offtake in April and a normalisation of the prices of key construction materials.

 

&ldquo We remain cautiously optimistic about the uptick of construction and construction-related activities ...&rdquo it said. The group&rsquo s sales order book of around S$1.4 billion is expected to be progressively delivered in the next 5 years, but this may be subject to further changes.

 

The group&rsquo s net asset value per ordinary share fell to S$1.42 as at Mar 31, 2023, down from S$1.4536 six months earlier.

STEEL solutions provider BRC Asia reported a net profit of S$11.7 million for the first quarter ended Dec 31, 2022, a fall of 12.2 per cent from the year-ago period.

 

Revenue for Q1 fell 4.5 per cent to S$341.2 million, the company said in a business update on Wednesday (Feb 8).

 

As at Dec 31, its sales order book stood at about S$1.4 billion, with duration of projects ranging up to 5 years, subject to further changes.

 

The company said the continued recovery of the construction industry in Singapore bodes well for its supply chain, including reinforcing steel.

 

But in the short term, the industry faces multiple challenges of escalating costs, particularly for labour and energy, as well as slower-than-usual site progress resulting in lower-than-expected contractual offtake.

 

&ldquo Slower offtake is also driving more intense competition for new contracts, compressing margins as firms in the industry strive to overcome the shortfall in delivery volumes,&rdquo said the company.

 

&ldquo Looking ahead, we continue to believe that once the kinks are ironed out, the local construction sector would push ahead to fulfil the substantial number of projects that remained to be completed.&rdquo

 

The company noted that while Singapore&rsquo s construction industry grew by 6.5 per cent in 2022, its value-added remained 19.3 per cent below pre-pandemic levels.

STEEL-solutions provider BRC Asia posted an 81 per cent rise in its net profit to S$50.4 million for its second half ended Sep 30, 2022, from S$27.9 million a year earlier.

 

The company recorded increased sales volume and higher steel prices in the year, it said in a bourse filing on Tuesday (Nov 29).

 

Earnings per share of the company stood at 18.36 Singapore cents for the half-year period, up from 11.46 cents the year before.

 

Revenue for H2 rose 34 per cent to S$905.9 million, from S$675.9 million previously.

 

A final dividend of six Singapore cents a share and a special dividend of six Singapore cents was proposed for the full year, up from the final dividend of four Singapore cents and the special dividend of four Singapore cents a year earlier. The date payable will be announced later.

 

For the full year ended Sep 30, the company posted an unprecedented net profit of S$90.2 million, up 92 per cent from S$47 million a year earlier.

 

Revenue rose 45 per cent on year to S$1.7 billion, an all-time high for the company, it said.

 

The company expects a low-key start in FY2023, followed by more robust project activity levels amid strong local construction demand and more supportive labour conditions.

 

BRC Asia&rsquo s chief executive Seah Kiin Peng expects the operating environment to be &ldquo much more challenging&rdquo amid rising costs for electricity and manpower. He noted that an increasingly competitive landscape caused by slow site progress may erode margins throughout the construction supply chain.

 

However, he added that construction remains a fundamental building block for Singapore. With the resumption of delayed projects, Seah also expects local reinforcing steel demand to improve from the second quarter of FY2023 onwards.

 

The recovery of the local construction sector, following major stoppages during the pandemic, has helped lift the earnings of not just contractors, but also upstream companies, like those who supply building materials. 

 

Two pure-play building materials stocks, BRC Asia and Pan-United Corp, have already gained 11.04% and 25% year to date respectively. Analysts covering these stocks have kept their upbeat view, suggesting further upside. 

 

BRC Asia, which provides steel reinforcement solutions for construction projects, reported on Aug 2 that earnings for its 3QFY2022 ended June had doubled from $10.2 million to $20.4 million. Revenue for the same period was up 52% y-o-y to $515 million, as the company enjoyed gains in both volume and prices. 

 

In their Aug 4 note, CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan maintain their &ldquo buy&rdquo call and target price of $2.50 on BRC Asia, representing a potential upside of 31.6% from the Aug 24 closing price of $1.71. 

 

They note that BRC Asia was able to maintain its profitability in the face of rising costs. Its net margins improved by 1 percentage point to 4% y-o-y for 3QFY2022, which they interpret as &ldquo BRC&rsquo s capability to pass on some of the higher costs&rdquo . 

 

In its earnings commentary, BRC Asia also maintains its upbeat take on the wider construction environment, citing official estimates that the growth of the local construction sector is accelerating.

 

In 2Q2022, the sector grew 3.8%, up from 1.8% recorded in the preceding first quarter. This was in part due to the relaxation of border restrictions on the inflow of migrant workers. 

 

However, there is a potential risk in the form of a higher number of workplace accidents, leading to safety time-outs and work stoppages with each fatality. In the first six months of 2022, there were 28 fatalities, up from 17 deaths during the same period pre-Covid in 2019. A higher number of dengue cases has also led to additional work stoppages. Ong and Tan think that these are &ldquo transient issues that should be alleviated in the upcoming quarters&rdquo , adding that they continue to expect a further recovery in construction activities in the second half of 2022. 

 

BRC Asia, to them, is trading at an &ldquo attractive&rdquo valuation of just 6x FY2023 estimated earnings. They also believe that with the company&rsquo s strong free cash flow generation, it can potentially offer a dividend yield of 11%, assuming a 60% dividend payout ratio. 

 

SAC Capital&rsquo s Peggy Mak, in her Aug 19 note, rates BRC Asia as &ldquo hold&rdquo with a target price of $1.92. She flags that en-bloc transactions have gained pace, which would spur the overall level of construction activities, including public housing. 

 

However, Mak cautions about possible near-term risk with higher interest rates and potential property cooling measures dampening the buying fever, hence lowering developers&rsquo appetite for new projects and, by extension, construction demand. 

 

Furthermore, rebar prices from China have corrected by 24% from the recent peak of RMB5,258 ($1,073) per ton in May this year, due to recessionary fears and a slowing Chinese economy. 

 

Nonetheless, she believes that steel prices will recover because of the current low inventory, the shuttering of China&rsquo s production capacity due to power rationing, and the higher energy prices that lift the cost of production. 

 

Rising prices, surging costs 

 

Besides steel bars, concrete is also a ubiquitous material at any construction site, and Pan-United Corp, which supplies ready-mix concrete (RMC) to sites, has also seen similar fortunes to BRC Asia. 

 

On Aug 3, Pan-United reported earnings of $13 million for its 1HFY2022 ended June 30, which is almost double compared to the same period last year. Revenue was up 22% y-o-y to $338 million, thanks to higher volumes and better selling prices. For example, the average selling prices of RMC in June was up 24% y-o-y. 

 

CGS-CIMB&rsquo s Ong and Tan think that near-term average selling prices (ASPs) are likely to remain elevated on the back of rising costs and rising operating expenses will continue to be a concern. They note that Pan-United recorded staff costs that were up 25% y-o-y and utilities up 20% y-o-y. Nevertheless, that the higher costs &ldquo remained well-handled&rdquo , and that the company&rsquo s ongoing investments in creating better-value RMC has helped mitigate rising costs. 

 

The analysts believe that the same workplace safety time-outs will weigh on Pan United&rsquo s RMC demand the way they did for BRC Asia&rsquo s steel. Nevertheless, overall sector tailwinds are &ldquo still intact&rdquo in 2HFY2022 with easing labour shortages and projects resuming. 

 

BRC Asia says in its earnings commentary that construction order books island-wide have remained &ldquo robust&rdquo due to strong demand for public housing and infrastructure projects. For example, the HDB remains on track to launch up to 23,000 new flats in 2022, with 3,900 and 4,600 flats launched in February and May respectively, and upcoming launches of 4,900 and 9,500 flats in August and November respectively. &ldquo This bodes well for the demand for reinforcing steel and BRC, which are an integral part of the local construction supply chain,&rdquo the company notes. 

 

Another local listed company with exposure to the building materials sector is Hong Leong Asia, part of the Hong Leong Group. Besides its own cement businesses in Malaysia via its stake in Tasek Corp, and Singapore Cement Manufacturing Co here, it holds a 44.7% stake in New York-listed China Yuchai International, which builds heavy machinery and engines out of its base in Guangxi, China. 

 

Closer to home, Hong Leong Asia last year raised its stake in BRC Asia from 3.6% to around 20% after investing $68.1 million via a placement of new shares at $1.48 each. 

 

On Aug 11, Hong Leong Asia reported that revenue for its building materials segment was up 26.5% y-o-y to $282 million. Profit after tax for the segment more than doubled y-o-y to $28.7 million from $10.7 million. These results include Hong Leong Asia&rsquo s 20% stake in BRC Asia. 

 

Hong Leong says that this was due to construction activities in Singapore and Malaysia continuing to recover and driving demand for concrete and related products, although it does warn that in Malaysia, the construction-related segment remains challenging given higher input costs, a shortage of labour and tighter credit conditions. 

 

Overall, Hong Leong Asia reported earnings of $42.6 million for its 1HFY2022, up 4.5% y-o-y. Revenue was down 26.1% y-o-y to $2.1 billion, led by the drop in its diesel engine business in China, which suffered from the pandemic-related curbs. Year to date, Hong Leong Asia shares are down 11.76% to close at 75 cents on Aug 24. 

 

In their Aug 23 note, CGS-CIMB analysts Ong and Tan, citing expectations of higher earnings for 2HFY2022 ending December, have kept their &ldquo add&rdquo call on Hong Leong Asia, raising their target price slightly from $1 to $1.05. &ldquo Potential catalysts include faster recovery in Singapore&rsquo s construction sector or Chinese government&rsquo s stimulus measures catalysing diesel engine sales,&rdquo they note. 

 

GKE limits RMC exposure 

 

However, not all Singapore-listed building materials plays are on the same track. GKE Corp for example, owns warehouses in Singapore, which are enjoying healthy demand from clients stocking up amid the pandemic. On the other hand, its other main business, in RMC, cannot be said to have done as well. 

 

GKE&rsquo s RMC plants are in Wuzhou and Cenxi cities in China, and in a previous interview with The Edge Singapore in 2021, GKE&rsquo s head of human resources, procurement and administration Chen Jiang Nan explained that due to the nature of RMC, the China operations are extremely local. 

 

While this means GKE&rsquo s RMC business is mostly immune from international supply chain troubles and the US-China trade war, the converse is true when China&rsquo s domestic economic growth slows following lockdown restrictions across the country to deal with the pandemic. 

 

For its FY2022 results ended May, GKE&rsquo s RMC segment suffered a 43.4% y-o-y drop in revenue to $29.9 million from $52.8 million in FY2021. The company says that this was due to &ldquo unexpected turmoil&rdquo in China&rsquo s real estate sector, as well as stringent precautionary measures to comply with China&rsquo s zero-Covid policy. 

 

Responding to queries from The Edge Singapore, GKE CEO Neo Cheow Hui explains that the spillover effect from over-leveraged property developers in China&rsquo s real estate sector, particularly in the residential segment, has affected the construction sector which supports property development projects. 

 

He maintains that demand for RMC remains but GKE prefers to manage its credit risk exposure by focusing on selling to infrastructure projects rather than to property developers. 

 

Furthermore, given the recent surge in Covid cases in China, precautionary measures had to be implemented, including constant disinfection and regular testing of employees, affecting operations, Neo adds. 

 

&ldquo Our RMC facilities, as well as the construction waste recycling plants, remain operational, but the slowdown in construction activities and fears of lockdowns are real concerns in the near term,&rdquo he says. 

 

Despite these short-term pressures, Neo is positive about the long-term prospects for its RMC business. As the plants are located in less developed cities, he notes that there are more opportunities to support local urbanisation and infrastructure projects.