BRC Asia Limited (SGX:BEC) is one of the companies that were badly affected by the Covid-19 pandemic.
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.
During the last quarter, their revenue dropped 83% yoy and reported a loss for the period. This is due to the 2 month nationwide circuit breaker and the subsequent snail-like pace of the restart of construction activity.
With the construction industry just starting to pick up the pace, BRC Asia will be able to resume their production at full swing in the coming weeks. However, we must be realistic with their short term prospects and look for its potential looking beyond FY2020.
Financial Highlights
After a strong start to the year, the construction industry was hit hard by the pandemic.
BRC’s 3Q2020 numbers were downright ugly. The Group has suspended all its non-exempted operations at its manufacturing facilities in Singapore for April and May 2020. This had an adverse direct financial impact on its performance.
Construction activity for June and July is also almost non-existent due to the extended lockdown of the workers in their dormitories.
Current Situation
Most projects were given the approval to start works. However, most firms still cannot start their works. This is because their workers were not given the clearance to leave their dormitories. We start to see dormitories allowing workers to come out to work only in mid July.
Besides this, the construction industry is facing major challenges such as
- Cash flow problems
- Labour shortage
- Increase costs due to Covid-19 safety measures
- Reduced productivity
- Project delay (time required to build on-site worker quarters)
Given the circumstances, I expect construction output for 2H20 to average about 50-60% of pre-Covid levels.
There’s Always A Silver Lining
Increased Demand for Pre-fabricated Rebars
Before the pandemic, BRC is the market leader in cut and bend reinforcement bars. This means that they have the ability to fabricate the shape and size of reinforcements according to the customers’ needs.
In the face of labour shortage, demand for such services should increase. With their technical know-how and high service standards, I believe that more construction firms will be willing to pay the premium to order pre-fabricated rebars to increase productivity.
Construction Demand Remains Strong
The construction sector is one of the few industries where there is high demand but low supply. Instead of cutthroat competition, we are seeing companies rejecting requests for quotation due to the overwhelming number of jobs on hand (and partly because of labour shortage).
There are a number of upcoming infrastructure projects, such as the Integrated Waste Management Facility, infrastructure works for Changi Airport Terminal 5, Jurong Region MRT Line and Cross Island MRT Line. These projects are set to sustain total construction demand for 2020 and 2021.
As of June 2020, BRC’s orderbook still stands strong at approx $934mil. Based on this, demand for BRC’s products is expected to remain as strong as 2019 or even better.
Business Risks
Loss in Productivity
Given the controlled restart of construction activity, companies may take a longer time to resume their activities on site. This will cause a slowdown in productivity and will lead to lower sales for BRC.
Credit Risks
After a 4 month shutdown of the construction sector, many firms are facing cashflow difficulties, especially the smaller contractors. Even though we have resumed site activities, there is an increase risk of contractors unable to fulfil the payment to their creditors/suppliers. This gives rise to higher credit risks throughout the industry going forward.
Valuation
In my previous post on BRC Asia, I forecast EPS of 17cts per share and assigned a PEx10. This gives a target price of $1.70 which I think is unachievable.
According to BRC’s commentary as well as my observations in the industry, we are only starting to see a pickup in construction activity in August.
As such, my forecast for 4Q20 is an EPS of 2cts per share, with FY2020’s EPS coming to about 10.6cts per share. This gives us a fair value of $1.06.
However, I believe that for FY2021, construction activity should be in full swing (barring any black swan event). This should give BRC an opportunity to rerate and I will adjust my fair value accordingly as we move forward.
Closing
In just a few months, my rather bullish view on BRC Asia has made a 180 degree turn. The current situation that the construction industry is facing will have an adverse impact on BRC Asia’s business.
Looking beyond FY2020, I choose to remain optimistic on their growth prospects as we see through this pandemic. Their technical know-how and market leadership position will help them adapt to the “new normal”. The release of pent up construction demand should also be a boon to their business overall.
Hence, I am willing to remain vested while waiting out this FY and continue to monitor their financial situation in the coming quarters.
Cheers.
Note: The Moss Piglet is vested in BRC Asia at an average price of $1.25.