• BRC Asia’s FY9/19 net profit of S$31.6m (+162% y-o-y) was in line with our expectations. BRC Asia surprised with a higher-than-expected dividend of 8 Scts.
• We expect further margin expansion for BRC Asia in FY20F, driven by its price leadership and cost synergies (post-acquisition of Lee Metal in 2018).
• We like BRC Asia for its good earnings visibility riding on the recovery in home market demand. Maintain ADD and Target Price of S$1.90.

A Solid End to FY19, With a Surprise Special Dividend Declared

• BRC ASIA LIMITED (SGX:BEC) posted S$31.6m net profit for FY19 (+162% y-o-y), in line with our expectations at 100% of our full-year forecast. This was mainly driven by strong margin expansion, with BRC Asia’s net margin improving to 3.5% in FY19 (FY18: 2.1%).
• BRC Asia declared special dividend of 3 Scts, bringing total dividend declared for FY19 to 8 Scts, implying a 59% payout ratio (5.2% dividend yield).

Expect Further Margin Expansion in FY20

• We forecast BRC Asia’s NPM to further expand to 4.1% in FY20F. We expect margin expansion to come from
  1. normalised industry pricing,
  2. whittling down of low-margin projects from BRC Asia’s orderbook, and
  3. further cost synergies from BRC Asia’s consolidation of Lee Metal.

Key Beneficiary of Singapore Construction Sector Demand Recovery

• According to the Building Construction Authority, total construction demand in Singapore grew by 14% y-o-y in 8M19 (2018: 23% y-o-y), and we expect the continued rollout of mega infrastructure projects to underpin growth over the next three years. BRC Asia is poised to benefit from this – it typically commands 3% of overall construction demand (average over the past 10 years).
• Orderbook remains strong at S$950m as at end-Sep; we expect BRC Asia to report net profit growth of 21.8% in FY20F.

Strong FCF Generation Could Sustain Higher Dividend Payout

• Given its strong cash generation ability and minimal capex needs of S$5m p.a., we forecast BRC Asia to generate FY20-22F FCF of S$0.25-0.35/share, which, in our view, will improve its net gearing from 92% as of end-FY19 to 27% by end-FY22F.
• We continue to see potentially higher dividend payout for FY20F, with BRC Asia’s FCF dividend coverage ratio high at 4.0x-5.4x for FY20-22F (assuming 35% payout).

Maintain ADD and Target Price of S$1.90

• We continue to like BRC Asia for its market leadership in Singapore’s reinforced steel industry, earnings visibility riding on the recovery in home market demand, and improving balance sheet strength.
• Maintain ADD and Target Price of S$1.90, based on 1.58x CY20F BVPS (Gordon growth model: ROE 13.7%, cost of equity 8.9%, 0.5% terminal growth).
• Re-rating catalysts include stronger-than-expected margin recovery, while downside risks include a Singapore’s construction demand and intensifying industry competition.

Source: CGS-CIMB Research - 20 Nov 2019