Analysts from CGS-CIMB Research and Phillip Securities Research have maintained their 'add' or 'buy’ ratings on steel supplier BRC Asia after the company exceeded expectations with its results for the 1QFY2022 ended December.

On Feb 10, BRC Asia reported a profit after tax of $13.3 million in its business update for the quarter.

On this, CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan have kept their target price unchanged at $2.10. Phillip Securities analyst Terence Chua has, too, kept his target price at $1.84.

“Our target price is based on 11 times FY2022 price-to-earnings ratio (P/E), still at a 15% discount to the 10-year historical average, on account of the uncertain environment,” says Phillip Securities' Terence Chua.

In addition, BRC Asia’s 1QFY2022 net profit exceeded expectations, according to the analyst. “In spite of the resurgence of Covid-19 in Singapore, we estimate that order deliveries went up as disruptions to construction schedules were minimised with more frequent testing,” says Chua. “The 6.5% higher q-o-q sales (from the Group’s voluntary update) also came as a surprise because of the seasonally weaker 1H of the financial year.”

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“Despite the strong beat, we are keeping our forecasts for FY2022 unchanged as we monitor the overall recovery of the construction sector,” he adds.

The company's order book inched up to $1.3 billion from $1.2 billion as the construction sector continues its recovery, says Chua. “We estimate that half of the order book will be fulfilled within the next 12-15 months,” he adds.

Moreover, BRC Asia benefitted from a free cash inflow of $132 million for the quarter, which was used to deleverage its balance sheet. “We believe a significant portion of the cash inflow was used to repay the trade facilities that it takes on to procure steel raw materials,” says Chua.

Despite the lower gearing ratio in 1Q22, the analyst still expects gearing for FY2022e-2023e to remain elevated as he forecasts firmer steel prices in 2022. This is because even though steel prices corrected by about 30% late last year, they have since rebounded by approximately 19% underpinned by prospects of strong demand supported by China’s plans of infrastructure investment in a bid to boost economic stability.

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BRC Asia is also seen to benefit from better expectations of construction demand in Singapore this year. The Building and Construction Authority has  upgraded its forecasts of Singapore's construction demand for 2022 to $27 billion-32 billion per year from the original $25 billion-32 billion per year, comparable with the preliminary estimates of $30 billion in 2021. Additionally, it also projects that demand for building materials will increase in tandem with the increased construction demand, according to the analyst. “Steel rebar demand is forecasted to grow to 1 million-1.2 million tonnes in 2022, representing ~22% y-o-y increase,” says Chua.

“We note that BCA’s forecasts for average construction demand in 2022-2025 excludes the development of Changi Airport Terminal 5 and expansion of the two integrated resorts. As our forecasts have not included these projects, there is upside if they go live,” Chua says.

In the near term, projects in the pipeline that will likely support the group’s growth are the Singapore Science Centre’s relocation, the Toa Payoh integrated development, Alexandra Hospital redevelopment, Bedok’s new integrated hospital, Phases 2-3 of the Cross Island MRT Line and the Downtown Line’s extension to Sungei Kadut.

“With an approximately 65% market share in the reinforced steel industry, we continue to see BRC Asia as a key beneficiary of the construction sector recovery,” Chua adds.

To CGS-CIMB's Ong and Tan, the results stood strong as the first half of the year is typically "a seasonally weaker period, given the rainy season and festive periods".

"We also noticed a rapid deleveraging of BRC’s balance sheet during the quarter – net gearing stood at 49% as of end-1QFY2022 (vs. end-FY2021: 117%). As majority of BRC’s outstanding loans are trade facilities to finance the procurement of steel raw materials to fulfil its existing sales orderbook, we do expect the net gearing ratio to fluctuate from quarter to quarter, but the lower gearing ratio reported for 1QFY2022 should ease some investors’ concerns over the capital structure of the group," write the analysts in their Feb 9 report.

The analysts are keeping their bullish outlook on the recovery of the construction sector in the FY2022, with the situation gradually alleviated towards the second half of 2022, with the government's commitment to "press on" with bringing in much-needed migrant workers.

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"The Building and Construction Authority (BCA) projected total nominal construction output to rise to $29 billion-$32 billion in FY2022 (+12-23% y-o-y), supported by a steady level of construction demand and the backlog of remaining workloads that were affected by the pandemic since 2020. BCA projects demand for building materials to increase correspondingly — steel rebar demand is forecast to grow to 1.0-1.2 million tonnes in FY2022 (+11-33% y-o-y)," write the analysts.

"With a 60% market share in the reinforced steel industry, BRC will be a key beneficiary of construction activity recovery, in our view. We currently project a conservative 10% net profit growth in FY2022 for BRC to $51.5 million," they add.

As at 2.10pm, shares in BRC Asia are trading flat at $1.68.

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