SI Research: BRC Asia – Opportunity Amidst Crisis

Jimmy Ng

Market bulls hardly had much time to rejoice following US and Chinese officials’ joint statement pledging commitment to address their trade concerns, before being caught by surprise 10 days later by President Trump’s unexpected move to reinstate tariffs on US$50 billion of Chinese imports in mid-June. Meanwhile Europe, along with Canada and Mexico, threatened a retaliation to hit back with levies on American exports should Trump administration decided to proceed with imposing tariffs on steel and aluminum imports from Europe. With a global trade war looming on the horizon, investors have reasons to be concerned.

Surrounded by much uncertainties arising from the trade tensions and the outcome could potentially swing either way, the steel industry is one sector that has been badly affected. While seeking opportunity amidst crisis in the local steel industry, steel reinforcement prefabricator BRC Asia (BRC) caught our attention.

Weak Demand Led To Margin Squeeze

Ever since the boom from 2010 up till 2014, Singapore’s construction industry has been in a continuous downward spiral for the last few years. According to statistics from the Ministry Of Trade and Industry revealed in the Economic Survey of Singapore 2017 report, private sector construction output saw a more severe contraction by 29 percent in 2017 to $13 billion due to a broad-based reduction in construction activities. This, coupled with an 11 percent drop in public construction output to $15 billion, pulled down full year construction output by 21 percent.

Correspondingly, total consumption of steel rebars fell to 1.5 million tonnes in 2017 from 1.6 million tonnes last year, in line with the slowdown of construction activities.

The last few years have proven to be very challenging for BRC. From FY14 to FY17, the group’s revenue slid at a compounded annual growth rate (CAGR) of negative 7.8 percent to $311.6 million while net profit shrank at an astonishing pace of negative 55.7 percent to merely $2.5 million in FY17.

While the government tried to boost public construction demand in 4Q17 through awarding contracts for civil engineering works such as Circle Line 6 and the Deep Tunnel Sewerage System Phase 2, total construction demand for the full year still dipped by 6.1 percent to $25 billion because of the prolonged weakness in private demand. Consequently, tender prices became more depressed as contractors competed aggressively for the smaller pie, leading to increased margin pressures within the reinforcing steel industry.

In fact, BRC’s gross and net profit margin had deteriorated drastically over the years to just 6.5 percent and 0.8 percent respectively in FY17, as compared to more reasonable margins in better times a few years ago.

BRC - Pic 1

Acquiring Lee Metal Group

In February this year, BRC made an offer to acquire fellow steel player Lee Metal Group (Lee Metal) at an offer price of $0.42 per share, which represents a premium of 9.1 percent to Lee Metal’s last traded price of $0.385 – being the last full market day prior to the announcement – and 21.4 percent higher than the company’s three-month volume-weighted average price at $0.346.

Being another established fabricator of steel products for the construction and building industry, BRC saw the acquisition of Lee Metal as complementary with potential synergies to be tapped through economies of scale, cross-selling to an enlarged customer base, improvement of productivity as well as sharing of knowledge and best practices.

With the Competition and Consumer Commission of Singapore giving the nod to the deal in April 2018 and BRC having received valid acceptances of the offer amounting to approximately 90.5 percent of issued shares as at 5 June 2018, the acquisition of Lee Metal is likely to go through. We look forward to how the inclusion of Lee Metal’s business may contribute positively to BRC’s performance in the near future.

Outlook Starting To Look Rosier

Geographically, 89 percent of BRC’s FY17 revenue was derived from the Singapore market while the remaining came from Malaysia and other regions at 10.7 percent and 0.3 percent respectively. Hence, regardless of whether US’s tariff on steel would eventually be implemented or not, we feel that its impact on the group’s top-line could be limited.

By turning our attention to the local construction sector outlook which could be more relevant to BRC’s core business, the prospect is no longer as dismal as it used to be. According to estimates by the Building and Construction Authority, total construction demand in 2018 is projected to be between $26 billion and $31 billion driven by an improvement in demand from both the public and private sector. Furthermore, an uplift in the property market sentiments underpinned by the current en bloc fever as well as an upturn in the broader economic growth could also translate into more work for the reinforcing steel industry.

In fact, we are already encouraged by the notable achievements in BRC’s 1H18 results with net profit doubling to $4.1 million on the back of 41.9 percent higher revenue, attributable to higher delivery volume and unit selling prices. In addition, the improved gross and net profit margin at 7.2 percent and 1.9 percent respectively are also equally heartening.

While we do not expect a strong rebound in the Singapore construction market soon as construction output remains subdued and it might still take a fair bit of time before the market could recover in time to come, we should not be too far off to say that the worst could be over within the next one to two years.