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CGS-CIMB keeps 'add' rating on BRC Asia, lowers TP to $2.20

The analysts expect a “meaningful rebound” in the company’s 2HFY2023 profitability on a strong industry order book.

CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan have maintained their “add” rating for BRC Asia BEC with a lower target price of $2.20 from $2.40 previously.

Calling on an improved 2HFY2023 ending Sept 30 after the “heightened safety” period in Singapore ending this month negatively impacted worksite activities nationwide, they expect a “meaningful rebound” in the company’s 2HFY2023 profitability on a strong industry order book.

“While we expected BRC to have a slower start to the year, its 1HFY2023 core net profit of
$26 million, a 34% y-o-y decrease, still came in below expectations at 35% of both our and Bloomberg consensus FY2023 forecasts,” say the analysts.

According to them, the lower project contractual offtake by its customers led to a y-o-y 10% lower revenue of $717 million for BRC in 1HFY2023. The company’s gross profit margin (GPM) was also negatively impacted, and came in at 7.4%, 1.3% points lower compared to 1HFY2022 due to a shift in sales mix, with a lower volume of value-added steel projects.

In spite of this, Ong and Tan say BRC’s interim dividend of 5 cents for 1HFY2023, 1 cent lower than the dividend issued in 1HFY2022, was in line with their expectations.

They expect BRC’s net profit to show a meaningful rebound to $41 million in 2HFY2023, which would represent a 57% improvement h-o-h but still 20% down y-o-y, as the “heightened safety” period imposed by the Ministry of Manpower comes to an end.

BRC has also noted a moderate improvement in the contractual offtake from customers since April with labour shortages easing further with trained migrant workers gradually adding to its workforce.

“We are optimistic on Singapore’s construction activities outlook through end-2024 underpinned by the construction industry’s multi-year high orderbook, and believe that BRC will be able to capitalise on the industry-wide recovery given its dominant market share in the reinforced steel industry,” say the analysts.

Given BRC’s weaker-than-expected 1HFY2023 profitability, they have lowered their volume and margin expectations for the company. Accordingly, their FY2023 to FY2025 earnings per share EPS forecasts have been cut by 6.4% to 9.5%.

“Nevertheless, given BRC’s continued strong cash flow generation, we believe our FY2023 dividend per share (DPS) assumption of 15 cents remains intact as that implies a 60% dividend payout ratio, offering an attractive dividend yield of 9.1% at its current share price,” they add.

Although the analysts believe BRC’s valuations remain attractive at a 6x FY2024 price-to-earnings ratio (P/E) with a strong dividend yield, they have lowered their target price $2.20, based on a 1.4x CY2023 price-to-book value ratio (P/Bv) as they raise their risk-free
rate assumptions.

Their re-rating catalysts include increased improvements in labour productivity driving an earlier recovery in construction activities, while downside risks include another extension to the “heightened safety” period and weaker construction demand due to a global economic slowdown, which could impact demand for BRC’s building materials.

As at 12.21pm, shares in BRC were trading flat at $1.65 with a dividend yield of 7.27%.

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