Ascendas REIT BRC Asia
When The Edge Singapore covered BRC Asia in October last year, the steel reinforcement solutions provider traded at $1.36 or 9.2 times earnings. Since then, the stock has climbed rapidly. On Jan 15, the stock closed up at $1.67 or 12.3 times earnings, chalking up a year-to-date gain of 9.9%.
According to the Building and Construction Authority (BCA), the total construction demand is expected to remain strong in 2020, underpinned by sustained public sector construction demand. BCA has forecast the total construction demand to range between $28 billion and $33 billion this year.
This is a larger forecast compared to BCA’s 2019 forecast of between $27 billion to $32 billion. And if last year’s outperformance is anything to go by, the total construction demand for this year could again surpass BCA’s 2020 forecast.
Last year, the total construction demand grew 9.5% to $33.4 billion, which was $1.4 billion higher than the upper bound of its 2019 forecast. The outperformance was mainly due to a stronger than expected increase in industrial construction demand for petrochemical facilities, despite the slowdown in the manufacturing sector, says BCA. Total preliminary construction demand last year for the public and private sector was $19 billion and $14.4 billion respectively, it notes.
Unsurprisingly, BCA recorded a positive set of results for FY2019 ended Sept 30, 2019. Revenue surged 61% y-o-y to $913.3 million on the back of higher trading and distribution of steel. The full sales volume contributed by Lee Metal also helped, following the company’s merger with the former. As a result, earnings more than doubled to $31.6 million from a year ago.
This year, BCA expects the public sector construction demand to range between $17.5 billion and $20.5 billion, comprising about 60% of the projected demand for this year. This will be supported by major infrastructure projects, such as the Integrated Waste Management Facility, Changi Airport Terminal 5, Jurong Region MRT Line and Cross Island MRT Line.
Private sector construction demand, on the other hand, is projected to be between $10.5 billion and $12.5 billion this year. This will be driven by the redevelopment of en bloc sale sites, recreational developments at Mandai Park, Changi Airport new taxiway and berth facilities at Jurong Port and Tanjong Pagar Terminal. BCA’s forecast, however, excludes any construction contracts by the two integrated resorts (IRs) pending confirmation on the timeline and the phasing of the expansion projects.
Given the bright prospects in construction ahead, the rally in BRC may still have legs. According to CGS-CIMB Research, BCA has projected steel rebar demand in Singapore to grow to 1.5 million to 1.7 million tonnes in 2020. On the back of higher volumes, the brokerage has forecast BRC to record y-o-y revenue growth of 5.1% to $959.6 million.
BRC also stands to benefit from strong margin expansion. This is because the company has been entering into more fixed price contracts with construction companies in view of weaker steel price outlook, notes CGS-CIMB. According to BCA, steel rebar prices in Singapore have been on a downtrend since May 2019, and the last reported price in November reflected m-o-m and y-o-y declines of 0.3% and 6.8%, respectively. CGS has forecast BRC to record y-o-y earnings growth of 43% to $45 million in 2020.
CGS-CIMB is maintaining its “add” rating for the stock with a higher target price of $2.05. “We believe BRC stands to benefit, given its strong market share of [about] 60% in the reinforcing steel industry,” CGS-CIMB analysts Ong Khang Chuen and Caleb Pang Huan Zhong wrote in a Jan 9 note. —