Excerpts from CGS-CIMB report
Analyst: ONG Khang Chuen, CFA
|Bent but not broken
■ BRC reported solid 2QFY9/20 core net profit (+122% yoy) on the back of strong margin expansion.
■ Reiterate Add. BRC’s leadership position in the reinforced steel industry makes it a good proxy for a construction sector recovery in the medium term.
Solid 2QFY9/20F results
Core net profit rose 122% yoy to S$11.9m during the quarter, mainly due to strong margin expansion.
GPM expanded by 4.9% pts yoy to 10.9% as BRC continues to benefit from:
1) normalised pricing competition within the steel rebar industry in Singapore and
2) stronger procurement power post its acquisition of Lee Metal.
1HFY20 core net profit came in at 66%/68% of our/Bloomberg consensus FY20F.
To take a hit from circuit breaker measures in 3QFY20
Construction works in Singapore are halted for two months (7 Apr to 1 Jun), due to circuit breaker (CB) measures announced by the government to mitigate the spread of Covid19.
With the stop work order, we expect minimal industry construction progress, which will negatively impact demand for steel rebars.
Some main contractors have signalled their intention to accelerate works after the CB is lifted, but we think this is more probable only in 4QFY20, given labour constraints and new conditions for working in the post-CB era.
We expect a staggered return to normalcy post-CB, and pencil in a net loss of S$10m for 3Q20 before returning to profitability in 4Q20.
Our FY20-22F EPS forecasts are lowered by 0.9%-34.9% accordingly.
Heightened emphasis to safeguard against receivables risk
BRC has recorded an increase in allowance for expected credit losses of S$4.9m in 2Q20, as it expects higher credit risk going forward with some customers more adversely impacted by CB measures.
Dominant market share
-- ONG Khang Chuen, CFA (photo),
Management is carefully monitoring the situation, and will cease supply of materials to customers at risk of default.
BRC also has trade credit insurance in place against c.70% of its receivables to safeguard itself against such risk.
Reiterate Add, with a lower TP of S$1.55
With our EPS cuts, our TP is lowered to S$1.55, based on 1.35x CY20F BVPS (GGM: ROE 11.9%, cost of equity 8.9%, terminal growth 0.5%).
Downside risks include counterparty credit risk and stricter government regulations which could further slow down construction activities in CY20.
Full report here.