UOB Kay Hian (UOBKH) analysts Llelleythan Tan and Heidi Mo are keeping their “buy” call and target price of $2.42 unchanged on steel supplier BRC Asia BEC , after the company reported a robust set of earnings for the 1HFY2024 ended March.
For the period, BRC saw a 47.0% y-o-y growth to $38.5 million in its earnings and a 5.8% y-o-y improvement in revenue to $758.3 million, driven by increased contributions from the higher-margin steel fabrication segment and lower raw material costs.
The results formed 43.4% and 43.8% respectively of Tan and Mo’s full-year estimates, in-line with their expectations, especially considering that the period is “historically a seasonally weaker half.”
The analysts write in their June 12 note: “1HFY2024 revenue was driven by higher construction demand while margins expanded on the back of increased contributions from the higher-margin steel fabrication segment coupled with lower raw material costs. As a result, 1HFY2024 gross and net margins rose 2.4 percentage points (ppts) y-o-y and 1.4 ppts y-o-y respectively.”
Tan and Mo add: “We expect further margin expansion from lower steel prices and a robust orderbook.”
In the 2QFY2024, BRC’s revenue was softer 4.4% y-o-y and 10.0% q-o-q, which the analysts attribute to lower contributions from the company’s lower-margin international trading segment.
On the other hand, gross profit in the quarter surged 33.9% y-o-y and 10.7% q-o-q, as did net profit, with a 45.7% y-o-y and 24.7% q-o-q growth, thanks to increased deliveries.
For the 1HFY2024, BRC declared an interim dividend of 6.0 cents per share, translating to a dividend payout ratio of 43%.
“As a recap, the group does not have a formal dividend policy but we opine that the group would be able to sustain its historical average payout ratio of 60% in FY2024, backed by its strong operating cash flows. Based on our estimates, this implies an attractive FY2024 dividend yield of around 8.7%,” note Tan and Mo.
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In the medium term, the analysts see a favourable outlook for BRC as strong demand from an expected large number of housing and development board (HDB) projects in Singapore are being planned and upcoming infrastructure projects such as the Changi Airport Terminal 5 and Integrated Resort expansion look to help support delivery volumes.
Although Singapore’s construction sector grew slower at 4.3% y-o-y in 1QFY2024 due to near-term challenges such as a market shortage of consulting engineering and architectural services, Tan and Mo note that the Building and Construction Authority has maintained a continued strong 2024 total construction demand of $32 billion to $38 billion, driven by ongoing economic growth.
The analysts expect BRC to deliver half of its robust as at end-2QFY2024 $1.3 billion orderbook in the next three to four quarters as volumes recover.
They write: “BRC remains a strong proxy to Singapore's construction sector, given its commanding market share domestically.”
“In our view, BRC's attractive 8.7% dividend yield and growing earnings would help support share price's performance moving forward,” concludes Tan and Mo.
Share price catalysts noted by the pair include the faster-than-expected recovery in construction activities, a complete relaxation of foreign labour restrictions and more public housing projects awarded to BRC.
As at 1.44 pm, shares in BRC Asia are trading two cents higher or 0.94% up at $2.14.
