The building and construction sector faces an intact recovery despite macro challenges, say CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan.
In a May 4 note, Ong and Tan are maintaining “overweight” on the sector. CGS-CIMB hosted BRC Asia, Pan-United Corporation and Vicplas International for a panel discussion last week. “They were cautiously optimistic on further construction sector recovery in FY2022.”
Ong and Tan are recommending “add” on highlighted companies BRC Asia, Pan-United Corp and Vicplas International with target prices of $2.10, 56 cents and 28 cents respectively.
Their top pick is BRC Asia for “its relatively attractive valuation and higher dividend yield”.
“Despite macro challenges, the companies appear to be cautiously optimistic of further construction activity recovery in FY2022, especially given the steady demand for new construction projects, coupled with the backlog of remaining workloads affected by the pandemic since 2020, further helped by the easing of the migrant worker shortage situation in coming quarters,” write Ong and Tan.
Aside from the rollout of new infrastructure projects (Cross Island MRT Line, Tuas Terminal), the building material players also expect tailwinds from a further ramp-up in public housing supply, which could bode well for demand, say the analysts.
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BRC Asia is involved in reinforced steel solutions, Pan-United in ready-mix concrete and Vicplas in uPVC (unplasticised polyvinyl chloride) pipes.
Ong and Tan say costs are rising but generally being passed on. “Higher commodity, freight and energy costs have led to higher input costs for building material players year-to-date (y-t-d). Generally, they have been able to pass on the higher costs, albeit potentially at a moderate pace to preserve long-term customer relationships.”
They add: “We believe BRC Asia and Pan-United have stronger pricing power due to their market leadership positions in respective sub-segments. Building material players highlighted their risk management policies to manage exposures amid volatile prices — for example, Vicplas frequently engages with customers to better sense volume requirements to facilitate procurement, while BRC Asia dynamic hedges its orderbook on a pooled basis to secure margins.”
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Resilient supply chain
Supply chain resiliency has improved compared to 2020, say Ong and Tan. “Thanks to diversified resources and supplies, building material players have been able to tide through multiple supply chain disruptions over the past two years. They continue to take steps to increase supply chain resiliency and cost efficiency.”
For example, Pan-United was able to leverage on its slag grinding plant in Johor to ensure better supply of raw materials amid disruptions; it has further improved supply chain efficiency from continued optimisation of in-house digital logistics platform (AiR).
Meanwhile, Vicplas is carrying a higher level of inventories to minimise risks from potential supply disruptions.
Environmental sustainability
All three companies are beneficiaries of the built environment sector embracing green construction. Pan-United offers over 150 concrete products nationally certified as green products and offers Pan-United CarbonCure concrete which involves carbon capture and utilisation (CCU) technology that injects mineralised carbon dioxide into wet concrete during mixing to reduce embodied carbon emissions.
BRC Asia’s reinforced steel solutions are essentially a substitute for labour-intensive and unproductive use of loose reinforcement bars handled on site.
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Meanwhile, Vicplas reformulated all its plastic product lines to be free of heavy metal from 2016. Vicplas was also the first uPVC pipe producer in Singapore to receive one Green Check Mark certification from the Singapore Green Building Council (SGBC) and is currently pursuing its second and third Check Marks from the SGBC.
Credit risk concerns
That said, credit risks continue to be a key concern, as Covid-19 impacts over the past two years have worsened the financial health of numerous industry players, which could limit their ability to ride on the current recovery trend, say Ong and Tan.
“All three players are closely monitoring cash collection and evaluating customers’ credit risks. They also generally have trade insurance in place to limit credit exposures,” they add.
As at 2.42pm, shares in BRC Asia are trading 1 cent lower, or 0.6% down, at $1.64; while shares in Pan-United are trading flat at 40 cents; and shares in Vicplas International are trading flat at 20.5 cents.
