Julius Berger Nigeria continues its year of renaissance
… We place a ‘buy’ rating on the stock
Continues to report impressive earnings
Julius Berger Nigeria Plc recently released its nine months (9M) 2019 results, reporting a 56percent year-on-year (y/y) improvement in profit after tax (PAT) to N5.3 billion, ahead of our N5 billion estimate.
While most line items came in flat versus expectations, the earnings beat was driven by smaller than expected operating expenses. Overall, the construction giant continued to report solid earnings in 2019, continuing its recovery from a less than inspiring 2018 performance.
Julius Berger Nigeria Plc 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.
Topline and operations continue to flatter
Julius Berger reported a topline of N60.5 billion in the three months (3M) period, 33percent higher year-on-year (y/y), albeit 1percent below our expectation. Notably, the strong topline performance was driven by increased revenue from both the public and private sectors in Nigeria, with the public sector contributing the bulk of topline (c.79percent). Overall, 9M’19 topline grew 62percent y/y to N192.3 billion, flat against our N193 billion expectation. Meanwhile, while gross margin fell by 310basis points (bps) y/y to 19percent in third-quarter (Q3), earnings before interest and taxes (EBIT) margin expanded by 390bps y/y to 8percent (Vetiva: 8percent), following a lower than expected operating expense line.
In absolute terms, Julius Berger reported a 158percent y/y jump in EBIT to N4.9 billion (Vetiva: N4.8 billion), taking 9M’19 EBIT 47percent higher y/y to N12.5 billion (Vetiva: N12.5 billion). With the Federal Goverment still accounting for a large portion of topline, Julius Berger continues to rely heavily on short term financing, with the company reporting a 49percent y/y jump in Net financing costs to N5 billion in 9M’19 (Vetiva: N5 billion). After accounting for a 9M’19 tax expense of N2.2 billion (Vetiva: N2.6 billion), PAT came in at N5.3 billion.
Similarly strong performance expected in fourth-quarter (Q4)
Given the strength of Julius Berger contract portfolio and the presence of the Presidential Infrastructure Development Fund (PIDF) which was created to ensure financing for construction projects, we forecast a strong y/y topline growth in Q4. However, according to news reports, work has stalled on the second Niger bridge project due to the civil disturbances, creating a risk to topline in Q4. To that end, we mildly reduce our full year 2019 topline estimate to N249 billion (Previous: N253 billion), representing a solid 28percent y/y growth.
We note that while Julius Berger had earlier commented on a possible large contract in Asia, there has been no update since and thus, we have excluded the impact from our forecast. On the other hand, we have maintained our forecast margins for the quarter, given that they fell largely in line with our expectations in 9M. All in, we forecast an full year 2019 profit after tax (PAT) of N7.2 billion (Previous: N8 billion) and a 12-month target price of N32.52. We place a ‘Buy’ rating on the stock.