DBS keeps 'buy' on BRC Asia despite 1HFY2023 dip, sees improvements to come

DBS analyst Lee Eun Young has reduced her target price to $1.89 from $2.22 previously.

Anticipating “better times” ahead, DBS Group Research analyst Lee Eun Young has maintained her “buy” call for BRC Asia with a reduced target price of $1.89 from $2.22 previously.

In her report dated May 16, the analyst says BRC’s dominant market position in steel reinforcing solutions. “With a market share of 60% to 70%, BRC’s dominant market share implies that the group is well positioned to ride the growth of the industry,” says Lee.

According to Lee, customers with big projects are more inclined to choose BRC because of its ability to handle large scale projects, which places the group in a good position to benefit from the upcoming ramp up of HDB projects, and other major projects such as the Changi Airport Terminal 5 and the expansion of integrated resorts.

Despite the long term stability that the analyst is projecting, BRC still faces a near term “overhang”. The company’s 1HFY2023 revenue declined 10% y-o-y to $717.1 million, below hers and consensus forecasts, while earnings fell 34% y-o-y on slower site progress and revenue mix, also below earlier estimates.

“Construction progress at sites was slower than expected in 1HFY2023, associated with safety reasons. In the near term, the heightened safety period from September 1, 2022 to May 31, 2023 could weigh on construction output, which affects the uptake of BRC’s solutions,” says Lee. “After the heightened safety period eases, an improving labour supply should help with the conversion of construction demand and backlog of construction spend.”

“Although the risk of an extension of the heightened safety period remains, our checks indicate that this is unlikely to continue. We thus look forward to a better 2HFY2023 and FY2024 which is backed by a strong order book and steady construction demand,” adds the analyst.

She believes BRC’s steady medium-term outlook bodes well for the company, whose construction backlog is still “substantial”, and expects construction demand of $25 billion to $32 billion per annum between 2024 and 2027.

Meanwhile, significant contributions to public sector demand will come from building projects and civil engineering works such as the Cross Island Line’s second and third phases and the Downtown Line extension.

“Despite recessionary risks, Singapore’s healthy economic fundamentals should continue to attract investments hence private sector construction demand should likely remain stable,” Lee explains. “With steady construction demand, we expect construction output and consequently demand for BRC’s solutions should remain firm in the medium term.”

Owing to the slower offtake of construction output and macroeconomic uncertainties, the analyst has revised her earnings estimates downwards by 16% and 12% for FY2023 and FY2024, with a lower target price of $1.89 from $2.22 previously.

Lee has also rolled forward our valuations to 8x FY2023 to FY2024 earnings, which is close to BRC’s historical mean.

Shares in BRC closed 1 cent or 0.61% down at $1.63 on May 19.

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