Yahoo Finance UOB Kay Hian maintains 'buy' on BRC in light of 'excellent' 3QFY2022, but lowers TP
UOBKH lowers its target price from $2.15 to $2, pointing at compressed margins for BRC Asia.
UOB Kay Hian analysts Llelleythan Tan and John Cheong have maintained their “buy” call on BRC Asia as the company posted robust results for the 3QFY2022 ended June.
They have, however, lowered their target price to $2.00 from $2.15 previously. The new target price is based on the same 0.7x FY2022 P/E, pegged to -0.5 standard deviation (s.d.) of BRC’s long-term average P/E (excluding outliers of over 2 s.d. at 25x), they say.
During the quarter, BRC Asia reported a net profit of $20.4 million, a 100% jump y-o-y. This was “in line with our expectations'', the analysts say, backed by higher delivery volumes and better construction demand.
However, this lower net profit figure was 23.2% lower q-o-q, due to a lower margin product mix in 3QFY2022.
Gross profit also showed a similar trend, up 106.7% y-o-y, but down 13.5% q-o-q as higher manpower and utilities costs compressed margins, leading to gross margin softening 2.6 percentage points q-o-q in 3QFY2022.
Nonetheless, BRC Asia’s orderbook remains robust at $1.15 billion, helped by increased demand for public housing and civil engineering works.
The analysts expect the group to deliver half of its current orderbook in the next three to four quarters as BRC’s current production capacity of 70% starts to ramp up, pointing out that 3QFY2022 delivery volumes were higher q-o-q as demand for construction recovers.
But labour supply is still below pre-pandemic levels, and is expected to improve going into 4QFY2022.
Tan and Ong says that although its management noted that the influx of new foreign workers has aided in alleviating the labour shortage, many experienced workers are also returning home as borders get lifted.
Due to the inexperience of these new workers, 3QFY0222 saw many fatal workplace accidents which led to sporadic stoppages of work. This is also compounded by emerging dengue clusters in workplaces, which led to several stoppages and checks as well.
“Overall, we expect Singapore’s labour supply recovery to eventually ramp up and normalise to pre-pandemic levels by 4QFY2022 or 1QFY2023,” they say.
In their report, the analysts have increased their revenue forecasts for the FY2022 to FY2024 after accounting for higher sales volumes.
They have, however, lowered their net profit forecasts for the same period due to lower gross margin assumptions. Tan and Ong’s net profit forecast for the FY2022, FY2023 and FY2024 have been lowered by 7.2%, 2.4% and 4.0% respectively.
“We reckon BRC is poised to post robust earnings in FY2022, backed by favourable industry tailwinds and higher steel prices,” the analysts write, noting that the company remains a “strong proxy” for Singapore’s construction sector
“However, we are cautious of any potential sharp moderation in steel prices, which may lead to a reversal of provisions and supernormal earnings thereafter,” they add. “Therefore, taking a conservative view, we have pegged our target price to -0.5 SD of BRC’s long-term average P/E instead of its mean”.
As of 1.31pm, shares of BRC Asia traded at $1.71, with a FY2022 P/B ratio of 1.1x and dividend yield of 5.3%.
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