Phillip Securities Research analyst Terence Chua maintains a &lsquo buy&rsquo rating on steel supplier BRC Asia with an unchanged target price of $1.84. 

 

&ldquo Our target price is based on 11 times FY2022e price-to-earnings ratio (P/E), still at a 15% discount to the 10-year historical average, on account of the uncertain environment,&rdquo says Chua. 

 

In addition, BRC Asia&rsquo s 1QFY2022 net profit exceeded expectations, according to the analyst. &ldquo 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,&rdquo says Chua. &ldquo The 6.5% higher q-o-q sales (from the Group&rsquo s voluntary update) also came as a surprise because of the seasonally weaker 1H of the financial year.&rdquo  

 

&ldquo Despite the strong beat, we are keeping our forecasts for FY2022e unchanged as we monitor the overall recovery of the construction sector,&rdquo 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. &ldquo We estimate that half of the order book will be fulfilled within the next 12-15 months,&rdquo 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. &ldquo 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,&rdquo 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&rsquo s plans of infrastructure investment in a bid to boost economic stability.

 

BCA 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. &ldquo Steel rebar demand is forecasted to grow to 1 million-1.2 million tonnes in 2022, representing ~22% y-o-y increase,&rdquo says Chua. 

 

&ldquo We note that BCA&rsquo 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,&rdquo Chua says.  

 

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

 

&ldquo 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,&rdquo Chua adds.