BRC Asia

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In general when buying minority stakes, listed companies prefer to have at least 20%, because once you own >=20%, accounting rules recognize it as an associate and will be able to equity account the minority stake's earnings on your own P/L (ie "share of results of associates"). If you own <20%, you can only recognize something on your own P/L when it declares dividends and we know dividends are generally always < accounting profit.

BRC Asia's purchase at 19.9%, just 0.1% short of 20% to allow recognition of P/L, looks to be intentional? Could we infer that the target purchase is probably loss-making? Big Grin

BRC Asia to buy 19.9% of steel reinforcement company for S$16 million

BRC entered into a conditional sales and purchase agreement with Daehan Steel and LTC Corp on Tuesday. Under the agreement, BRC will acquire 4.6 million ordinary shares of Angkasa Daehan Steel from LTC, and Daehan Steel will acquire 6.9 million ordinary shares from LTC.

Daehan Steel will hold 80.1 per cent of Angkasa Daehan Steel after the transaction.
Reasons for taking a 19.9% investment instead of 20% investment in a company


There are a few key reasons why an investor may choose to take a 19.9% investment in a company instead of a 20% investment:
1.         To avoid the equity method of accounting. Under U.S. GAAP, an ownership stake of 20% or more in another company is considered a significant influence, requiring the investor to use the equity method of accounting. This method is more complex as it requires the investor to report their proportional share of the investee's net income/loss on their own financial statements. By keeping the ownership below 20%, the simpler cost method of accounting can be used instead.
2.         To avoid triggering certain regulatory requirements. Stock exchanges like Nasdaq often require shareholder approval for issuances exceeding 20% of a company's outstanding shares. By keeping the investment below 19.9%, the investee company can avoid having to hold a shareholder vote for the transaction.
3.         To maintain a non-controlling interest. An ownership stake of 20% or more could be viewed as giving the investor significant influence or control over the investee company's operations. Keeping the stake below 20% helps ensure it remains a passive, non-controlling investment.

Aside, it is possible
The investor may has wanted to avoid the presumption of having ability to exercise significant influence over the investee. (The other single investor having 80.1% ownership), or
The other single investor may not want to give the impression that the investor has the ability to exercise significant influence over the investee.
Spore construction industry seems to be slowed down a bit recently. Putting on some brakes might not be bad, since we have seen painful receivables' write-offs in the past downturn. But now in the upturn, one has to be wary of high rates and costs causing the eventual receivables' write-offs

BRC Asia has completed most of its CAPEX spending much earlier and together with a conservative depreciation policy (ie. depreciate the assets' paper value faster than actual useful life), it is now throwing large amounts of FCF to reduce its previous debt incurred to load up on inventories.

Of course, the company has not forgotten to reward its majority/controlling shareholder with an increase of the interim dividend to 6 cents (WAS: 5 cents).

Condensed Unaudited Interim Financial Statements For the six months ended 31 March 2024

Be that as it may, on a q-o-q seasonally-adjusted basis, the sector contracted by 1.7% in the first quarter, pulling back from the 2% expansion in the previous quarter.

Indeed, the last 6 months saw a steady stream of projects being launched for tender, particularly from the public sector. On the other hand, however, project offtake from ongoing projects seemed to have slowed down generally. Anecdotally, our customers pointed to a lack of resources from the consulting engineering and architectural segments, as well as regulatory challenges, for a general slow down in progress at project sites. Further, whilst most of the larger builders seemed to have become more financially stable with the completion of pre-Covid work and the advent of newly tendered jobs that are profitable, credit concerns remained, particularly with the smaller main contractors, as interest rates remained persistently high.
BRC Asia had a 17% stake in a fully integrated hospitality business (airport+hotel), which was non-core, of course unless it thought that the non-core business would "smoothen out" the business cycle of its core business. To recap, it was a joint effort between some construction buddies in Spore back in 2017, with its first hotel started in 2017 as well.

Due to the fact that it has been incurring accounting losses, BRC Asia's accounting for this associate had been written, in addition to an additional impairment in the last FY. With the sale, BRC Asia is going to recognize a 16mil gain over its 2.5mil accounting book value. A few things could be learnt from this:

(1) Accounting losses will masquerade actual market value (PPE at cost/depreciation VS investment properties at FV), especially those with real assets.
(2) BRC Asia is pretty conservative in its accounting.


In this regard, reference is made to the Group's unaudited financial results for the six months ended 31 March 2024 ("1H2024"). Given that the Group recorded an increase in share of losses of the Group's interest in Pristine in 1H2024, the Disposal would have resulted in a gain on disposal of approximately S$16.0 million over Pristine's aggregate book value of approximately S$2.5 million as at 31 March 2024

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