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Broker's take: CGS-CIMB initiates coverage on BRC Asia with 'add', street-high price target of S$1.90

CGS-CIMB has initiated coverage on mainboard-listed BRC Asia with an "add" call and a target price of S$1.90. The brokerage is bullish on the supplier of prefabricated steel products, which stands to benefit from the recovery of Singapore's construction sector.

At Monday's midday break, BRC Asia shares were six Singapore cents or 4.1 per cent higher at S$1.53 on about 521,000 shares traded.

"We like BRC for its market leadership in Singapore’s reinforced steel industry, earnings visibility riding on the recovering home market demand, and improving balance sheet strength," said CGS-CIMB analysts Ong Khang Chuen and Caleb Pang.

Since the acquisition and privatisation of Lee Metal Group in July 2018, BRC Asia has doubled its market share in rebar steel to 40-60 per cent and 50-70 per cent in mesh steel.

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The analysts also believe that the market has yet to "fully appreciate BRC Asia’s strengthened position in the reinforcing steel industry" and with less aggressive pricing following industry consolidation, "we expect stronger procurement power and cost synergies to boost its net margins".

With Singapore's construction sector's recovery, CGS-CIMB expects the roll-out of large infrastructure projects to underpin growth for BRC Asia over the next three years.

BRC Asia also has the ability to generate cash, with the brokerage estimating free cash flow for FY2019-2021 to range between S$0.29-0.38 per share.

This, Mr Ong and Mr Pang added, "will improve its net gearing from 125 per cent as of end-FY2018 to 49 per cent by end-FY2021, as management also plans to pare down its long-term debt".

The company also has the capacity to pay higher dividends in the coming years.

The analysts have identified a stronger-than-expected margin recovery as a re-rating catalyst for the stock.

Meanwhile, downside risks to their recommendation include a slowdown in Singapore’s construction demand and intensifying industry competition.