Excerpts from UOB KH report
Analyst: Lucas Teng & Llelleythan Tan
| 2QFY20: Gradual Return To Work
BRC’s 2QFY20 core profit of S$10m is in line with expectations, although the group expects an adverse impact from the circuit breaker period with a stop in construction activities.
However, the large proportion of public infrastructure projects is a good safety net.
Maintain BUY with a lower PE-based target price of S$1.52.
• 2QFY20 net profit up 86% yoy. BRC Asia’s (BRC) reported 2QFY20 earnings of S$10m is in line with expectations, with 1HFY20 earnings of S$22.7m forming 68% of our full-year estimates.
However, the group expects adverse direct financial impact on its performance due to the Circuit Breaker measures.
• Revenue slightly lower. Despite the higher sales volume, the group reported revenue of S$458.6m for 1HFY20, 2% lower compared with 1HFY19 due to lower ASPs.
The direct impact of COVID-19 during 2QFY20 mainly lies in production, as the group’s manufacturing operations in Senai, Johor had remained closed in conjunction with the Malaysian government's Movement Control Order (MCO).
• Gross margins down, but held up relatively well. Gross margins for 2QFY20 came in at 10.9% (13.1%, -2.2ppt qoq). The group continues to benefit from cost synergies from bulk raw material purchases.
BRC also recorded an allowance for expected credit losses on trade receivables.
The impairment for the quarter amounted to S$2.9m, a larger quantum compared with 1QFY20.
• Expecting weakness in the next quarter. While the group had obtained approval to restart its manufacturing operations in Malaysia on 4 May 20, operations are still very much demand led by construction project works which have been hampered by the Circuit Breaker measures.
This would mean little or no sales revenue in Singapore for two months (April and May 20) of the next quarter.
• Recovery likely to be gradual. The number of foreign workers infected with COVID-19 remains at elevated levels.
Normalcy from Sept?
“The current situation still appears to be fluid and subject to changes, but on the current basis, management is eyeing a staggered recovery through Jun-Aug, while possibly returning close to normalcy from Sep 20 onwards. Infrastructure projects such as MRT works would likely be leading the way for resumption of operations.”
According to the Ministry of Health, the Multi-Ministry Taskforce has embarked on a systematic plan to test all migrant workers in the dormitories to ensure that the workers are well, and can safely resume work when their sectors gradually reopen, while noting that it may take several weeks, going into June or July for testing to be completed.
• Receivables risk remains. The group is watching its receivables, especially with regards to smaller construction establishments which may not weather the COVID-19 storm.
• Lower earnings by 34% for FY20 and 17% for FY21-22. We factor in close to minimal construction activities in 3QFY20, with a progressive recovery till 1QFY21.
While recovery may be gradual from safe distancing measures at worksites, we opine that projects will likely remain intact given the large proportion of infrastructure projects in the pipeline.
• Maintain BUY with a lower target price of S$1.52, based on 11.5x FY21F PE as we roll forward our valuation base.
This is pegged to its long-term average mean (excluding outliers of >2SD at 25x). The exclusion is primarily from the high base in FY17-18.
While near-term outlook is weaker, a medium-term recovery from pent-up construction activities will bode well for BRC.
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|• Strong earnings on the back of construction upcycle.
• More public housing projects.
• Divestment of non-core assets
Full report here.