CGS International analysts Ong Khang Chuen and Kenneth Tan are keeping their “add” call on steel supplier BRC Asia BEC at a lowered target price of $2.40 from $2.50 previously after the company reported a profit after tax of 51.0% higher y-oy to $34.1 million for the 3QFY2024 ended June 30.
Chuen and Tan note that aside from the $16.5 million gain from the disposal of its associate, BRC’s 3QFY2024 core net profit of $17.6 million was 22% lower y-o-y.
The group’s 9MFY2024 core net profit formed 68% of the analysts’ and 66% of Bloomberg’s full-year forecasts, to which they note is “slightly below expectations” as the pair had expected “more seasonal strength” in the 2HFY2024.
They write in their Aug 7 report: “We attribute the earnings miss in 3QFY2024 mainly to lower-than-expected sales volume and a product mix shift towards lower-margin products during the quarter.”
Meanwhile, a report from the Building and Construction Authority (BCA) notes that the demand for steel bars in Singapore for the months of April and May combined rose 24% y-o-y, driven by a strong industry order book and higher level of construction activities.
In the 2Q2024, the same report points to industry construction output growing by 6% y-o-y, while the Ministry of Trade and Industry estimated that Singapore construction sector’s gross domestic product (GDP) contribution grew 4.3% y-o-y.
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“We expect a steady pipeline of projects to be launched and awarded in the coming five years,” write Chuen and Tan.
“With construction projects likely to skew more towards infrastructure (which uses more lower-margin cut-and-bend products) in the coming years given slowing private investments, we cut our FY2024 to FY2026 earnings per share (EPS) by 6.2% to 7.6% on mix changes.”
Overall, Chuen and Tan believe BRC “remains on track” to pay out 18 cents in total dividends in FY2024, due to stronger profitability and a further reduction in net gearing to 15% in end-June from 49% in end-June FY2023, which translates into 8.3% dividend yield.
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Re-rating catalysts noted by the analysts include a strong improvement in offtake volumes, earnings-accretive merger and acquisitions (M&As), while downside risks include counter-party credit risks and an economic slowdown, negatively impacting construction demand.
As at 2.50pm, shares in BRC Asia are trading flat at $2.17.
