Admittedly, I was late to this party and I’m kicking myself for not noting the signs the past few months even when I’m working in this industry myself. It was only after reading BRC Asia (SGX:BEC)’s latest Annual Report that I realized the clues were right in front of me all along.
2019 was a pretty down year for Singapore’s construction landscape and I avoided all construction stocks except for OKP Holdings (SGX:5CF). Public projects up for tender are small and ultra-competitive, companies left right centre are on the verge of bankrupcy.
However, since Nov/Dec, things started to change.
- Firstly, I started receiving more and more requests for quotation from contractors working on the Cross Island Line and Jurong Region Line (new projects to be awarded soon?).
- Secondly, contracts awarded in 2018 esp North/South Corridor projects are picking up after wrapping up their initial preliminary and design phase.
- Thirdly, Changi East is buzzing with construction activity (it’s like a different world out there).
- Fourthly, my friend who runs a logistics business once remarked to me that his largest customer is BRC Asia and they are delivering reinforcement bars to Punggol everyday.
- Lastly, my company’s purchaser informed me to order all my reinforcement bars from BRC Asia as they are cheaper than the other suppliers.
On hindsight, everything looked so obvious. Looking forward, I think BRC Asia still has room to grow in terms of profitability and revenue growth.
Company Background
BRC Asia (SGX:BEC) is Singapore’s leading reinforcement bar(rebar) and welded mesh supplier. They command the largest market share for both rebar and mesh with 40-60% and 50-70% market share.
As a testament to the recognition of their brand, welded mesh in Singapore is more commonly called “BRC” instead of its correct term (seriously, there are people in construction who only recognise the word “BRC” instead of welded mesh)..
Product and Services
BRC is mainly a solutions provider for prefabricated reinforcing steel, offering steel products that are cut and bend in accordance to each project’s requirements. They purchase steel rebars (usually 12m length) from their own sources and fabricates into different structural forms.
By doing so, BRC can help the client cut down on labour and site space required for bending the rebars on site by cutting and bending it in their fabrication yard and deliver it to you.
In addition to that, BRC offers design services where the client can inform BRC of their required shapes and BRC can produce shop drawings for you to vett through before fabrication. Personally, this is very useful to me as there are times when you have to order cut-and-bend rebars of varying lengths, BRC will help you look at your construction drawings and proposed their own rebar design for you. Saves me alot of time and it looks more professional when you present to the Client/Owner.
In terms of speed, they are second to none. The earliest that I had received from the day I issued the purchase order was 3 days. 5 tons of rebar, cut and bend to my required design, sent to my site in 3 days.
Board of Directors
Chairman and Independent Director
After stepping down from public office, Mr Teo Ser Luck was back in the private sector and was shortly appointed at Independent Director and Chairman of BRC Asia in late 2017.
I view his background as a plus even though he is not from this sector previously, but his work experience at the highest level means he will be able to adapt well and as someone from the “outside”, his vision could steer BRC away from the traditional construction mindset (If anyone noticed, construction are like dinosaurs, we have not really seen a breakthrough in technology and construction method since Caterpillar came along).
Chief Executive Office and Executive Director
Although recently appointed CEO, Mr Seah Kiin Peng has been with BRC since 2010 and has been assisting the previous Group Managing Director in running the business before taking over the reins in Oct 2016. I would say that he is the one holding the steering wheels while the Chairman gives the directions.
Together, they form the most handsome Chairman and CEO pair in SGX listed companies.
Growth Engines
Better, Faster, Cheaper
A tribute to former Minister of Manpower Lim Swee Say, CEO Mr Seah used his catchphrase “Better, Faster, Cheaper” in his Annual Reports in 2017 and 2018. Based on my experience working with them and other rebar suppliers, indeed they are have managed to achieve it.
In this year’s Annual Report, Mr Seah has changed to “Building Better”, which is to focus on improving their operations through the upgrading of technology and automation. In a low margin business, if they are able to invest in technology to improve on efficiency and operating margins, I think this will further move them ahead of the pack.
Cost Savings from Synergies
In 2018, BRC Asia bought Lee Metal to become the largest rebar supplier in Singapore. From their Annual Report 2019, management has stated that they spend 2019 consolidating the two businesses and there is still some fine tuning to do this year. They did a fine job by announcing a spectacular set of results for FY2019.
I believe that there will be a continual improvement in margins this year. 2019’s net profit margin was 3.5% and EPS was 13.53 cents. An improvement of every percentage point in net margins will lead to improvement in EPS by 3.9cents, which is a rather large improvement in EPS. (Note: assuming revenue was maintained)
Improving Construction Outlook
As I have mentioned earlier, I expect construction activity to pick up in 2020. This will be a boon to BRC as they have the largest market share in Singapore. Furthermore, as BCA is looking towards productivity and efficiency, their value-added service will help increase demand for their products.
CGS-CIMB’s recent analyst piece on construction sector also expects construction demand to remain strong and the growth in 2019 construction order book will translate to more construction activity on the ground.
As of September 2019, their order book stands at $950mil, and I don’t think that it include newly awarded projects and smaller scale projects that did not require contracts (Only larger projects will get a contract fixed rate to control their costs, smaller projects will order only when required).
Bonus: Expansion Plans
Chairman Mr Teo has stated in the Annual Report that expanding overseas in the way forward for the company to grow. BRC is currently expanding into China, Malaysia and Thailand but the impact on earnings is not there yet. The potential is there but the execution remains yet to be seen. This is why any positive development in this space will be a bonus.
Financials
BRC Asia only acquired Lee Metal and 2018 and thus I do not really find it meaningful to look at their past year records.
One very positive thing to note is that after the acquisition, it only took BRC a year to consolidate both companies’ business operations and have such huge growth in revenue but at the same time, keep expenses low. This really shows the capability of their management.
Cashflow looks healthy, adding $24mil into their coffers. Total FY19 dividend of 8cts, including the special dividend of 3cts amounts to about $18mil hence it is sustainable but I think that it will be a one time thing and dividend should revert back to 5cts. As I’ve said before, this is only the first year after their Lee Metal acquisition and thus, I would still continue to monitor if they can sustain such cashflow.
BRC Asia has a high equity to debt ratio at 1.11 due to the bank loans taken to fund the Lee Metal acquisition. They have reduced their debt to equity from 1.52 to 1.11 this FY, but I would rather they use more of their free cash flow to reduce their debt instead of issuing dividends. This is not really a major concern as of now as their interest coverage ratio is more than 5 which is still at a healthy level.
Hidden Asset
BRC Asia has a $30mil Good Class Bungalow in Nassim Road (initially bought by Lee Metal) and is listed as Asset Held For Sale in their balance sheet. It is currently under construction and is expected to be completed in 2020 this year. If sold, it will be be boost to their cashflow but the question is about the timing as GCBs are not easy to sell imo.
Valuation
During the construction boom years of 2010-2014/5, their net margins were around 6.7% on average (Data taken from Gurufocus.com) and as construction is picking up with so many upcoming major developments announced (https://www.straitstimes.com/business/economy/construction-demand-in-singapore-expected-to-stay-strong-this-year-after-rising-95 ), I expect their margins to go up.
For FY2020, I shall forecast their revenue to hit the $1 billion mark with net margin of 4%. This would mean a net profit of about $40mil and EPS of 17cts per share. I did not rely on the other analysts’ research reports but their forecast is about the same.
A simple forward PEx10 multiple would give them a target share price of $1.70, which is about 4.3% above current share price of $1.63.
Risk
The biggest risk would be the fluctuations in steel price, a significant increase in steel price will affect their COGS and thus gross margin will be lower. However, their largest shareholder, Esteel, is a steel trader hence I think that they will have some sort of advantage in steel prices compared to other rebar suppliers.
Conclusion
I’m kicking myself for taking a closer look at this company until recently. Previously their high debt has irked me and thus this company was not on my watchlist. What changed my view is their synergy achieved with their merger and also their value added service which I personally liked alot.
The current share price is a little too high for me to enter, hence I will wait for a pullback (hopefully there is one). With all the analyst coverage forecasting similar growth rates, I think that growth for this company has sort of priced into the stock price and it will only re-rate when they beat market expectations.
If you are interested in investing in construction materials sector, another market leader to take note of is Pan United (SGX:P52), a concrete supplier, which has also seen its share price increase 50% off its lows last year. If it is true that construction in Singapore has bottomed, Pan United will also stand to benefit as you cannot do construction without concrete (and steel, of course). Will probably share my working experience with them and why they are the market leader in the near future.
Cheers.
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