• Recovery in Singapore’s construction demand should drive steel rebar volume growth in 2020F, potentially benefiting BRC ASIA (SGX:BEC).
• We expect stronger margin expansion for BRC Asia in FY9/20F, driven by lower steel price and stronger procurement power.
• We expect BRC Asia to report a strong 1QFY20F at 56% y-o-y NP growth. We raise FY20-22F EPS by 0.4-17%.
• Maintain ADD with a higher target price for BRC Asia.

Higher Steel Rebar Demand in 2020 to Drive BRC’s Volume Growth

• The Building and Construction Authority (BCA) announced that 2019’s total construction demand in Singapore reached a 5-year high of S$33.4bn, above the upper bound of its previous S$27bn-32bn forecast. Construction demand is expected to remain strong in 2020F, with BCA forecasting a range of S$28bn-33bn.
• Supported by the improved construction demand since 2018, BCA projects steel rebar demand in Singapore to grow to 1.5m-1.7m tonnes in 2020F (2019: 1.4m tonnes).
• We believe BRC Asia stands to benefit, given its strong market share of 60% in the reinforcing steel industry. On the back of stronger volumes, we forecast BRC Asia to record revenue growth of 5.1% y-o-y in FY9/20F.

Strong Margin Expansion to Continue in FY20F

• We forecast BRC Asia to record stronger GPM margin expansion of 1.9% pts to 10.3% GPM in FY20F (previously 9.4%). BRC Asia has been entering into more fixed price contracts with construction companies in view of weaker steel price outlook.
• According to BRC Asia, steel rebar prices in Singapore have been on a downtrend since May 2019, and last reported price in Nov 2019 reflected a decline of -0.3% m-o-m and -6.8% y-o-y. This could potentially translate into better profits for BRC Asia.
• We also expect BRC Asia to benefit 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 in FY20F.

We Forecast 56% Core Net Profit Growth in 1QFY9/20F

• Benefiting from the weaker steel prices, we forecast BRC Asia to record 56% core net profit growth to S$9.6m in 1QFY20F.
• We raise our FY20-22F EPS forecasts by 0.4-17.0% on the back of higher volume and stronger margin assumptions, and now expect BRC Asia to record net profit of S$45m in FY20F (+43% y-o-y).

Maintain ADD With a Higher Target Price

• We maintain our ADD call as 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. With our upward EPS revision, our target price rises, based on 1.65x CY20F BVPS (Gordon growth model: ROE 14.4%, cost of equity 8.9%, 0.5% terminal growth).
• Re-rating catalysts include stronger-than-expected margin expansion, while downside risks include counterparty credit risks and intensifying industry competition.

Source: CGS-CIMB Research - 9 Jan 2020