Identifying attractive SGX-listed construction stocks

Singapore has seen a gradual recovery of the economy as the country rebounds from its worst recession since independence.  Singapore’s economy grew 7.2% in 2021 amid the COVID-19 pandemic, led by the construction sector which grew 18.7%. Investor sentiment remains positive as the markets are looking for companies expected to benefit from the economic recovery.

The Research Team at Lim & Tan Securities is bullish on the construction sector riding on the COVID-19 recovery. As the Singapore economy gradually reopens and COVID-19 is treated as endemic, we expect both a continuation of the cyclical upturn and an accelerated recovery, owing to the pent-up demand that resulted from low construction recovery in the past year.

As seen in the table below, we have identified these five SGX-listed construction companies which we believe would benefit from a positive macro outlook on construction, and may be of interest to investors:

*Closing prices as of 4 March 2022

Tiong Woon (TP: S$0.92, 92% upside) – Tiong Woon is a crane specialist that serves the O&G, infrastructure, petrochemical and construction sectors. We like it due to the recovery of construction demand and in the petrochemical sector, its unique value proposition and a strong balance sheet. Valuations are undemanding at 7.7x PE and 0.4x P/B.  Dividend yield while low at 0.8% is on a gradual increase in the past 3 years (from 0.25 cents to 0.4 cents).

Read more about Tiong Woon

Choo Chiang (TP: S$0.48, 50% upside) – Choo Chiang is one of the leading retailers and distributors of electrical products and accessories in Singapore. We like it due to the booming property market, order visibility from upcoming projects and its strong financial position. It is trading at attractive valuations of 7.3x P/E, a 40% discount to its mean P/E of 13.0x since its IPO in July 2015.

Read more about Choo Chiang

Pan-United (TP: S$0.50, 45% upside) – Pan-United is a technologically driven, pure-play concrete and logistics company. They are the leading ready-mixed concrete (RMC) and slag provider with an estimated 40% market share. We like the company due to the rising cost of RMC, strong order book and the green initiatives led by Pan-United. It trades at 18.9x P/E and 1.2x P/B.

Read more about Pan-United

KSH (TP: S$0.50, 43% upside) – KSH is a home grown contractor cum developer with a track record of 41 years in residential, commercial, industrial, hotels, institutions and infrastructure projects. We like the company due to its good track record, strong order book and future revenue recognition. The company trades at 10.5x P/E and 0.6x P/B with a 5.7% dividend yield.

Read more about KSH

BRC Asia (TP: S$2.01, 20% upside) – BRC Asia is a long-standing player with a 70% market share in the prefabricated steel reinforcement industry. They are highly experienced suppliers of steel reinforcement bars, wires, meshes and cages. Being a market leader, BRC Asia plays a crucial role in supplying the bigger construction projects in Singapore. We like the company due to its strong order book, potential synergies and attractive valuations of 8.4x P/E with dividend yield of 7.1%.

Read more about BRC Asia

Tiong Woon (BQM)

Tiong Woon (TP: S$0.92, 92% upside) – Tiong Woon is a crane specialist that serves the O&G, infrastructure, petrochemical and construction sectors. We like it due to the recovery of construction demand and petrochemical sector, its unique value proposition and a strong balance sheet. Valuations are undemanding at 7.7x PE and 0.4x P/B. Dividend yield while low at 0.8% is on a gradual increase in the past 3 years (from 0.25 cents to 0.4 cents).

1. Recovery of construction demand

While projects are being delayed in 2020 due to Covid-19, it is hard to see cancellation of construction projects in Singapore unlike other countries. Despite construction halts and low activity during the height of the pandemic, crane services remained a necessity throughout the construction process. As construction activities pick up in the COVID-19 recovery and cyclical upturn, we expect Tiong Woon to do exceptionally well as it is faced with demand of both new and existing projects simultaneously.

In addition, we expect Tiong Woon to be a beneficiary of the HDB’s use of Prefabricated Prefinished Volumetric Construction (PPVC) as their main construction method to speed up the building process. The PPVC method requires 50-64 ton tower cranes for the upcoming BTO projects, a service that smaller crane companies cannot provide. With Tiong Woon’s recent purchase of 20 Yong Mao Tower cranes in 2019, they have the capabilities to participate in these PPVC projects.

These heavy lift cranes also provide Tiong Woon the ability to participate in petrochemical projects including the Chemical and Refining Integrated Singapore Project (CRISP) and Integrated Waste Management Facility (IWMF). Tiong Woon’s economic moat is its ability to provide specialised heavy lifting services for bigger projects with its cranes which are costly but reap great rewards and margins if utilised correctly and efficiently. Additionally, we expect the increase in oil prices to boost capital expenditure by major oil players which will flow into Tiong Woon’s order books eventually.

2. Unique Value Proposition

Main income from Tiong Woon stems from rentals of its cranes. Unlike other players in the construction sector, Tiong Woon is in a better position as they charge on a per hour/month/contract basis. If there is a delay in a project (i.e. due to Covid-19), TWC would be able to utilize their cranes longer and receive higher payments from their customers unlike material providers who are contracted to provide a fix amount of materials as per their project requirement. The risk factor is ensuring that the customer is able to pay and to counter that, TWC has been tightening up their accounts receivable risk profile. With its large fleet of cranes built over time, TWC can be flexible with project delays without compromising on the provision of haulage services to other clients.

3. Strong Balance Sheet

Despite being in the construction sector where firms need high working capital due to the capital intensive nature of their project, TWC is not highly leveraged unlike its peers. This is because their cash flows are very strong (which can fund their working capital) with 5-years average operating cash flow coming in at S$38mln (TWC’s market cap is at S$116.1mln). Majority of TWC’s leverage also comes from a property loan (not part of operations), which currently has an estimated valuation surplus of S$45mln (39% of market cap/$0.19cts per share).

Choo Chiang (42E)

Choo Chiang (TP: S$0.48, 50% upside) – Choo Chiang is one of the leading retailers and distributors of electrical products and accessories in Singapore. We like it due to the booming property market, order visibility from upcoming projects and its strong financial position. It is trading at attractive valuations of 7.3x P/E, a 40% discount to its mean P/E of 13.0x since its IPO in July 2015.

1. Booming property market

As the construction sector resumes its recovery, we expect Choo Chiang to benefit from the increase in sales of electrical products and accessories for residential and commercial property. Total units sold for HDB and private resale units rose 18% and 82% respectively in 2021 and will remain high going forward in 2022 amid the backlog coming from construction delays. As a beneficiary of the end side of the construction value chain, Choo Chiang stands to benefit from the higher demand expected of electrical products for renovation works.

2. Order visibility from upcoming projects

Before 2019, Choo Chiang derives its revenue from non-project sales with individual contractors and walk-in customers at its retail outlets. Since 2019, Choo Chiang branched out into project orders with tie-ups with main contractors. Together with the backlog of projects in 2020 arising from the COVID-19 shutdown, we expect order visibility over the next 3 years. This strategic direction exposes the company to additional market share in the residential, commercial, government and healthcare segments. It also provides an avenue for the company to include a bigger portion of its own proprietary in-house brands “CCM” and “CRM” which contribute better margins. All in, we are expecting Choo Chiang’s revenue to register 16% CAGR through FY23F.

3. Strong financial position

Choo Chiang is presently in a net cash position of S$13.7mln which equates to 21% of current market cap. Interest coverage ratio is at a strong 46x, with the entire portion of interest expense being used to pay for its lease liabilities. Moving forward, we expect Choo Chiang to continue growing its cash pile from its earnings growth and potential divestment of its 12 investment properties. The company’s strong cash position allows it to look for bargain opportunities to expand its retail outlets network across Singapore.

Pan United (P52)

Pan-United (TP: S$0.50, 45% upside) – Pan-United is a technologically driven, pure-play concrete and logistics company. They are the leading ready-mixed concrete (RMC) and slag provider with an estimated 40% market share. We like the company due to its strong order book, rising cost of RMC and the green initiatives led by Pan-United. It trades at 18.9x P/E and 1.2x P/B.

1. Strong order book

Pan United works with various industries and produces unique mixes of cement that strengthens their expertise as a cement specialist. They have an estimated 40% market share and they are the market leader in the cement space. With this expertise, they are involved in many large scale government projects such as BTO, Greater Southern Waterfront, NS corridor, rapid transit system, cross island line, Integrated Resorts (IR) and Terminal 5 (T5). These government backed projects generate healthy cash flows as receivables are paid in a timely manner, strengthening Pan United’s balance sheet and cash position.

2. Rising cost of ready-mixed concrete (RMC)

According to BCA, RMC prices rose 3.6% YoY on the back of higher raw-material prices. RMC scarcity, demand spikes, higher freight and fuel costs will contribute to hikes in RMC price. This increase translates to higher profit margins for Pan United.  With large volume of RMC selling at a high price, we expect this upturn to generate exceptional profits for Pan United

3. Pan-United’s green capabilities

Singapore’s Greener Infrastructure and Buildings 2030 targets greening 80% of Singapore’s buildings (by Gross Floor Area) by 2030 and 80% of new buildings (by Gross Floor Area) to be SLE buildings from 2030. In the traditionally price sensitive project-bidding environment, construction projects usually goes to the most cost efficient bidder. However, with the advent of Singapore’s green plan, government construction projects are likely to prioritise green objectives over a lower bidder who cannot fulfil the requirements. We anticipate that Pan United’s flagship sustainability product CarbonCure, together with half of their products being low-carbon and green-certified, makes it probable that they will win more contracts, subjected to their capacity.

KSH (ERO)

KSH (TP: S$0.50, 43% upside) – KSH is a home grown contractor cum developer with a track record of 41 years in residential, commercial, industrial, hotels, institutions and infrastructure projects. We like the company due to its good track record, strong order book and future revenue recognition. The company trades at 10.5x P/E and 0.6x P/B with a 5.7% dividend yield.

1. Good track record

KSH has proven its capability of handling construction projects across a broad spectrum of industries. Its projects have performed well in CONQUAS, a standard assessment system on the quality of building projects. For the construction of NUS University Sports Centre and Heartbeat@Bedok, KSH received two BCA Construction on Excellence Awards in the year 2019. Since listing, KSH has broadened its business portfolio and grown its geographical presence. Beyond its core construction business, the Group is also actively engaged in property development and investment with residential, mixed and commercial projects geographically diversified across the Asia-Pacific and European regions.

2. Strong order book

KSH clinched a S$171.8mln design and build contract under Biopolis Phase 6 development in one-north as well as works at the adjacent Buona Vista Node of the rail corridor from Ho Bee Land Limited. With the addition of this new contract, KSH’s order book is currently at S$547mln which will provide them with business visibility till 2024.  The company bids for approximately S$2bln worth of contracts on average per year. Annually, construction revenues should range between S$200-250mln providing construction profits of S$10-20mln.

3. Future revenue recognition

As KSH’s four Singapore development projects have been almost fully sold, management expects S$500mln worth of development revenue and S$50mln profit to be progressively recognized over the next 3 financial years. Another 500 units of their China (GaoBeiDian) development project has been sold and about S$6mln profit would be recognized in FY2022. We expect FY2022 profit to rebound strongly to S$18.8mln from S$5.0mln, giving a forward PE of 10.5x.

BRC Asia (BEC)

BRC Asia (TP: S$2.01, 20% upside) – BRC Asia is a long-standing player with a 70% market share in the prefabricated steel reinforcement industry. They are highly experienced suppliers of steel reinforcement bars, wires, meshes and cages. Being a market leader, BRC Asia plays a crucial role in supplying the bigger construction projects in Singapore. We like the company due to its strong order book, potential synergies and attractive valuations of 8.4x P/E with dividend yield of 7.1%.

1. Strong order book

The Housing and Development Board launched 17,000 BTO flats in 2021, and will launch up to 23,000 BTO flats each year in 2022 and 2023. This bodes well for reinforcing steel and BRC Asia, which are an integral part of the local construction supply chain. HDB projects are the most lucrative for BRC Asia as the highest amount of mesh is used per ton of cement compared to other projects such as private housing. As such, we expect BRC Asia’s order book to benefit greatly from the upcoming BTO projects. On top of BTO projects, BRC is heavily involved in other infrastructure projects such as the Greater Southern Waterfront, NS corridor, T5 and IR. Order book currently stands at approximately S$1.3 billion, enough to provide up to 5 years of revenue visibility for the company.

2. Potential synergies between Hong Leong Asia and BRC Asia

In August 2021, Hong Leong Asia (HLA) acquired a 20% stake in BRC Asia. As HLA is a household name in Singapore with leading brands in ready-mix and precast for the construction sector, BRC Asia believes that HLA’s support will enhance their growth, particularly in BRC’s quest to expand internationally and through the automation opportunities within PPVC building technology. This move is also aligned with the government’s push for automation and specialization of the construction industry to improve productivity.

3. Attractive valuations with earnings growth

Taking into account the sizeable number of construction contracts that had been awarded during the last 15 months or so, we are expecting the Group to register another record year in FY22 where we are forecasting its net profit to jump 17% YoY to hit S$55mln from S$47mln in FY21. BRC Asia is attractively valued at 8.4x P/E, a 34% discount to its 10-year historical average P/E of 12.7x. BRC Asia has doubled its dividends to S$0.12 in FY21, which represents a very attractive 7.1% dividend yield at a 62% dividend payout ratio. For FY22, we believe that BRC Asia can dish out higher dividends at S$0.14 which is an 8.3% dividend yield.

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