Julius Berger: Is construction giant’s cyclical rebound sustainable?

After being at the receiving end of Nigeria crushing economic recession which started mid-2015, the country’s largest constructions giant Julius Berger will be hoping recent introduction of a new technology to the construction of roads in the country will also cause a boomerang effect on the company financials performance in 2018.

CEO of Julius Berger Wolfgang Goetsch recently announced it has introduced a new technology to the construction of roads in the country which would grind the old asphalt and introduce more lasting and enduring roads with an asphaltic concrete.

Last year ended on a positive note for the company as it recorded a 2 percent revenue increase from N138 billion in 2016 to N141 billion in 2017 and a profit before tax of N3.7 billion in 2017 compared to N1.4 billion in 2016. Also, Earnings per share (EPS) for the group increased from N3.36 in 2016 to N3.61 in 2017 as the company also declared a final dividend of N1 per share.

BusinessDay investigation revealed that despite the country’s exit from recession Julius Berger is yet reach the heights attained before 2015 as its full year 2017 revenue declined by 28 percent to N141 billion compared to N196 billion attained in 2014 as its Market capitalization also dropped from N80 billion in 2014 to N36.9 billion in 2017.

Return on assets (ROA) which is a financial ratio showing the percentage of profit a company earns in relation to its overall resources increased slightly from 1.76 percent in 2016 to 1.79 percent in 2017 however it crashed to 0.70 in 2015 from the heights of 3.41 percent in 2014.
Also, Return on Equity (ROE) the measurement of a company’s profitability which reveals how much profit a company generates with the money shareholders have invested, reduced slightly from 17.91 percent in 2016 to 17.25 percent but also failed to reach the peak of 35.82 percent in 2014.

EBITDA margin, an assessment of a firm’s operating profitability as a percentage of its total revenue dropped in 2017 to 11.74 percent compared to 14.21 percent in 2016.
Net profit margin which calculates the percentage of profit a company produces from its total revenue increased to 3.36 percent in 2017 from 3.19 percent in 2016, however it dropped to drastically to 1.31 in 2015 from the heights of 4.19 percent in 2014.
“The delay in the passage and implementation of Nigeria’s budgets might have played a role in this as majority of Julius Berger contracts comes from governments,” Ayodeji Ebo, CEO at Afri-invest securities Limited said.

Also, Current ratio, a liquidity ratio that measures a company’s ability to pay short-term and long-term obligations increased from 1.15 percent in 2016 to 1.26 percent in 2017.

Further investigation showed Contract and other receivables rose from N92 billion in 2016 to N106 billion in 2017.

Speaking on the way forward Ebo said the government has a strong role to play in making sure construction firms return to the heights of 2014.

“The key to a reversal of fortune for Julius Berger is an increase in government contracts and their ability to mitigate against an unlikely crash in exchange rates. They need to win back some of the market share lost to Chinese heavyweight, CCECC. Fortunately, they are doing this already,” Ebo said.

“The government needs to reduce the leakages in the released of money for contractors as a lot of money meant for projects are always diverted.”

A further insight into its 2016 financial report suggest billionaire businessman Mike Adenuga is now the single largest majority shareholder in Julius Berger Nigeria Plc via a Special Purpose Vehicle (SPV) called Goldstone Estates Ltd.

Special Purpose Vehicle is a subsidiary of a company that attempts to isolate risk from the parent company by maintaining its assets and liabilities on a completely separate balance sheet.

German based international engineering and services group, Bilfinger Berger one of the company’s major shareholders sold 9 percent of its stake to Goldstone Estates Ltd in 2014, increasing Goldstone Estates Ltd stake to 19.9 percent making it the single largest shareholder in Julius Berger Nigeria.

Bilfinger Berger had earlier in 2012 sold its 10 percent stake to Nestoil  an indigenous engineering firm owned by Ernest Azudialu-Obiejesi in a deal worth N1.4 billion via a vehicle called Watertown Energy Ltd.

Last year, Julius Berger Nigeria also announced new faces in its boards; Belinda Disu and Gladys Talabi.

While Belinda Disu is the daughter of Adenuga and former Executive Director at Globacom, Gladys Talabi was a former Executive Director Legal and Security Services at Globacom and has worked there for over 15 years. Prior to that, she worked in Devcom Merchant bank which was also owned by Adenuga. Devcom was merged with Equitorial Trust Bank also owned by Adenuga in November 2005, and then merged with Sterling Bank in September 2011.

The new faces coupled with new initiatives are already yielding fruits for the company as it reported a 3 percent increase in revenue to N35.32 billion for the first quarter 2018 compared to N34.15 billion reported for the period ended March 2017 while Profit after Tax (PAT) increased to N1.49 billion compared to N426.9 million loss after tax reported March 2017.

Julius Berger Nigeria Plc also reported earnings per share of 223 kobo for the period ended March 2018 compared to 7 kobo loss per share reported for the period ended March 2017.

The principal activities of the company are the planning and construction of all sorts of civil engineering works.

Julius Berger Plc was incorporated on February 18, 1970 as a private limited liability company. It was converted to a public limited liability company and listed on the Nigerian Stock exchange on September 20, 1991. The shares of the company are currently trading at N28 with a negative one year return of 22.34 percent

“The permanent solution is for the government to involve a Public private partnership (PPP) scheme were the private sector will begin to fund projects through commercial arrangement which is more sustainable,” Johnson Chukwu CEO of Crowy Assets Limited said.