Excerpts from UOB KH report
Analyst: Lucas Teng & Llelleythan Tan
|FY20: Building Up For A Strong Rebound. Upgrade To BUY With 38% Upside
BRC’s FY20 net profit of S$20.4m was in line with expectations, although full-year dividends of 6 S cents came in ahead of expectations.
Gross margins will likely remain solid, given the group’s bulk purchasing abilities since its acquisition of Lee Metal.
Upgrade to BUY with target price of S$1.88 as we raise our FY21-22F earnings forecasts by 60%, on the back of solid margins and recovery of construction activities.
• Results in line with expectations, but positive dividend surprise. BRC Asia’s (BRC) reported FY20 profit of S$20.4m, forming 97% of our full-year estimates, is in line with expectations.
BRC was affected by losses from its associate, Pristine Islands Investment, a 17% stake in a Maldives hotel and resort business.
The group’s share of losses amounted toS$14.4m, with an impairment of S$6.8m.
|The group declared a full-year dividend of 6 Scents (vs FY19: 8 S Cents).
Payout ratio increased to almost 70%. The group has a dividend payout policy of 30% of core earnings for FY20.
• Sequential recovery, gross margins up. Revenue recovered by 237.0% qoq in 4QFY20,compared to 3QFY20 with minimal construction activities.
Overall revenue was down 47.4%yoy in 4QFY20, similar to the industry’s revenue which was down by 46.6% in the quarter.
BRC reversed into a small profit-making position in 4QFY20 compared to a loss in 3QFY20.
Gross margin of 12.2% in 4QFY20 was impressively held up (+3.3 ppt yoy) as the group continues to benefit from lower costs for bulk raw material purchases.
• Building back up in 2021. According to the Building Construction Authority (BCA), construction demand is expected to recover to some extent from 2021, supported by public residential developments and upgrading works, developments at the Jurong Lake District, construction of new healthcare facilities and various infrastructure projects such as the construction of the Cross Island MRT Line.
BRC’s orderbook remains solid at S$1b.
• Margins remain solid. We note the robust gross margins in 4QFY20, which are at pre-COVID-19 levels.
The group appears to be affected by a lesser extent by the new normal working conditions of COVID-19 safe management measures at construction sites.
BRC noted that activities have reached economically-viable levels from the second half of Aug 20 onwards, while procurement of bulk raw materials continue to see cost savings since the acquisition of Lee Metal in 2017.
Assuming the level of construction activities remains at current levels, we opine that margins will likely be sustained, given favourable raw material bulk purchases.
Gross margin have improved by almost 4.3ppt since 2017 (6.5% in 2017).
Overall, the group remains cautious of credit risks in the industry.
• New construction projects picking up from a low. Build-to-Order (BTO) projects continue to be favourable for BRC, with the recent new project launches in Tengah, Bishan and Toa Payoh being oversubscribed.
2020 BTO flats launches were slightly higher than that in 2019 and we opine that new construction contracts awarded will likely recover off the low seen in Aug 20, seeing that new contracts awarded in Sep 20 were up (+102% mom).
We are optimistic of BRC’s recovery, given its strong orderbook as well as its sizeable market share.
• Divestment of non-core property. BRC also recently received a purchaser’s exercise option regarding the proposal disposal of a residential property under development, for an indicated consideration of S$38.4m.
This provides additional capital to the group.
• Raise earnings forecasts by 60% for FY21-22F. We see margins being well supported for BRC, as construction activities normalise.
We have revised our gross margins assumption to 10.5% (vs 9.0% previously) given the better-than-expected margins seen in 4QFY20.
This should be well supported even at current construction activity levels, given the group’s track record of margins since its acquisition of Lee Metal in 2017.
We see earnings rebounding strongly in FY21, up 88% yoy, with the gradual normalisation of construction activities and sustained margins.
• Upgrade to BUY with higher target price of S$1.88, based on 11.5x FY21F PE. This is pegged to its long-term average (excluding outliers of >2SD at 25x).
The exclusion is primarily from the high base in FY17-18.
• Key risks: Credit risk from smaller construction players.
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• Faster-than-expected recovery in construction activities.
• More public housing projects.
Full report here.
CGS-CIMB report (target price: $1.90) is here.