• BRC Asia posted a strong 1QFY20 core net profit of S$11.9m (+93% y-o-y). Results were above our forecasts due to stronger-than-expected GPM.
• We remain positive on BRC Asia’s FY20F outlook, albeit with some near-term headwinds from the Covid-19 outbreak.
• Reiterate ADD, with an unchanged Target Price of S$2.05.
• BRC Asia remains our top pick for the construction industry.

Strong 1QFY9/20 Results

• BRC Asia (SGX:BEC) reported a stellar 1Q20 core net profit of S$11.9m (+93% y-o-y), forming 26%/29% of our/Bloomberg consensus’ full-year projection. This is despite 1H being a slower period seasonally for the group, due to festive seasons, including Christmas and Chinese New Year.
• The results beat came mainly from stronger GPM, which expanded by 6.1% pts y-o-y to 13.1% in 1Q20. We believe this was contributed by:
  1. stronger procurement power, and
  2. lower steel rebar prices.

Temporary Covid-19 Impact; Investment Thesis Remains Intact

• Management has seen volume deliveries drop by 5-10% in Feb due to the Covid-19 outbreak, as construction activities in Singapore were temporarily impacted by the staggered return of Chinese workers (which make up 10% of the construction workforce).
• Nevertheless, management remains cautiously optimistic on its FY20F outlook, as it expects construction companies to catch up on the slack later as the situation improves.
• We believe our FY20F volume growth forecast of 8% for BRC Asia remains intact, given that it is at the lower end of the Building and Construction Authority’s forecasted 7-21% y-o-y growth for steel bar demand in 2020F.

Strong Margin Expansion to Continue in FY20F

• We forecast BRC Asia to record a GPM expansion of 1.9% pts to 10.3% in FY20F. BRC Asia has been entering into more fixed price contracts with construction companies, in view of the weaker steel price outlook.
• According to BCA, steel rebar prices in Singapore have been on a downtrend since May 2019 (Jan 2020: -4.2% 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. the 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.
• Overall, we expect BRC Asia to record a net profit of S$45m in FY20F (+43% y-o-y).

Reiterate ADD, With Target Price of S$2.05

• Reiterate ADD. We make no changes to our EPS forecasts. Our Target Price is kept at S$2.05, still based on 1.65x CY20F BVPS (GGM: ROE 14.4%, cost of equity 8.9%, terminal growth 0.5%).
• Re-rating catalysts include a stronger margin expansion; downside risks include slower volume growth due to weaker construction activities amid the Covid-19 outbreak and counterparty credit risks.

Source: CGS-CIMB Research - 3 Mar 2020