SNAPSHOT

• PAT outperforms estimate following improvement in margins 

• High finance charges countered by declining FX costs 

• More optimistic on growth as firm strengthens profitability resolve 

• TP revised higher, BUY rating issued 

Decent Q2 supported by cost reduction 

01 Aug 2018 ( Lagos ) : Julius Berger recently released its H1’18 results, reporting a bottom line ofN2.6 billion, a significant turnaround from theN0.4 billion loss in H1’17 and much higher than analyst'sN1.0 billion expectation. Revenue came in 5% higher y/y atN73.1 billion (Vetiva's analysts:N71.9 billion), supported by higher earnings from Government (up 5% y/y and 10% q/q) and Private contracts (up 27% y/y but down 2% q/q). Analysts recall that JBERGER recently announced a healthy contract portfolio, estimated at c.?650 billion as well as an order backlog, well over c.?100 billion. Operating profit also rose 36% y/y toN1.8 billion (Vetiva's analysts:N2.0 billion loss), supported by the higher topline and a 98bps y/y reduction in operating costs as a % of sales. 

Furthermore, boosted by Other Income (arising from the FX gain recorded in Q1’18), EBIT doubled y/y toN6.6 billion in H1’18, beating analyst'sN4.4 billion estimate. Meanwhile, with JBERGER still dependent on short-term financing, finance cost remained elevated atN2.6 billion (H1’17:N0.4 billion). FX acquisition losses however dropped 95% y/y toN0.1 billion, supported by the relatively stable exchange rate environment. Overall, Profit before tax came in atN3.9 billion, much higher than theN55.8 million in H1’17 and analyst'sN1.3 billion expectation. 

Earnings were also decent on a q/q basis, with JBERGER reporting a PAT ofN1.6 billion in Q2’18 standalone vs. Q1’18:N1.5 billion and Q2’17:N72.2 million. Notably, whilst performances from previous quarters have been supported by one-off incomes (mostly from the sale of assets and FX gains), analysts note improvement in operating performance in Q2’18, boosted by a 7% q/q growth in topline toN37.8 billion and a 12% q/q moderation in operating costs. Consequently, JBERGER reported an operating profit ofN4.3 billion in Q2’18 (Q2’17:N0.2 billion, Q1’18:N2.5 billion) – albeit softened by FX loss ofN1.9 billion within the quarter. 

More positive outlook on the horizon… 

Analysts are more optimistic about JBERGER given their more positive outlook for the sector as well as the drive to contain operational costs. Specifically, management announced plans to increase local procurement of raw materials, streamline operations and recycle used asphalt in the construction of the Abuja-Kano-Kaduna road. 

Also, after three years of no major investment, management announced plans to invest up toN5 billion in PPE in 2018, with further investments in outer years. The company is also looking to cut financing costs by focusing more on private sector contracts, targeting a 60:40 split in favor of Government contracts in the near term and a 50-50 split in the medium term (current 74:26). Analysts recall that JBERGER’s high finance costs have been driven by the need for short-term financing due to a huge receivables balance from government contracts. 

Estimates revised on better-than expected quarter 

Analysts have revised their estimates to reflect the better than expected performance in H1’18. Analysts maintain their positive outlook on the construction sector, driven by anticipated election spending. Hence, analysts revise their topline estimate higher toN149.0 billion (Previous:N145.2 billion) to account for the revenue beat. Furthermore, analysts raise their EBIT estimate higher toN15.2 billion (Previous:N8.6 billion) – supported by the cost containment so far. 

After adjusting for interest and tax, their FY’18 PAT is raised toN6.6 billion (Previous:N1.7 billion) and their target price raised toN29.26 (Previous:N25.27). With a current market price ofN25.00, analysts place a BUY rating on JBERGER.

Business Description 

Julius Berger Nigeria PLC (JBERGER) is a leading construction company engaged in the planning and construction of civil engineering works in Nigeria and a foremost contractor to Nigerian Governments. It operates through three segments: Civil Works, Building Works, and Services. The company was founded in 1965 and is headquartered in Abuja, Nigeria. 

Reporting for EasyKobo on Wednesday, 1 July 2018 in Lagos, Nigeria

Source:  Onyeka Ijeoma from Vetiva Capital Management Limited