Julius Berger: FX Losses, Inactivity Deflate Earnings Performance
Analysts at Vetiva Capital led by Onyeka Ijeoma have forecasted a 12-month price of ₦36.06 for Julius Berger despite rather disappointing earnings released.
Julius Berger, a leading construction giant and foremost contractor to Nigerian government had a rough ride in the second quarter due to lockdown, and devaluation of Naira.
The company’s earnings closed at ₦1.9 billion loss after tax in the first half (H1’20), down from a ₦2.8 billion after ta profit in H1’19.
This is below our ₦0.7 billion PAT expectation, analysts at Vetiva held.
Vetiva noted that earnings pressure was mostly driven by a slowdown in revenue amidst a challenging operating environment as well as losses arising from the currency adjustment in the second quarter of the year.
“We recall that in a bid to curb the spread of the COVID-19 virus, lockdowns were enacted across various states in Nigeria, limiting construction activity in the quarter”, Vetiva explained.
Although, the firm held that earnings results from key cement producers show a gradual recovery in May and June post-lockdown, Vetiva believes that the hit from minimal activity in April dragged Julius Berger’s topline.
The firm stated that public and private sector revenues were also hit by the slowdown in economic activity and the sudden drop in crude prices, limiting capital spend potential.
Consequently, the company second quarter revenue dropped 33% year on year to ₦46.1 billion as against analysts’ estimate of ₦52.6 billion.
This took first half 2020 topline 23% lower to ₦102.1 billion as against N108.1 billion projected by Vetiva capital.
Dragged by the reduction and restriction in activity, as well as reflecting inflationary pressure, operating margin fell by 470 basis points to 2% the second quarter of 2020.
Operating profit dropped 78% year on year to ₦1 billion, meanwhile analysts at Vetiva had projected ₦0.9 billion.
Also, dragged by FX loss of N2.8 billion, Julius Berger reported a loss before interest and tax of ₦1.7 billion, a sharp drop from N5.2 billion EBIT recorded Q2’19.
Combined with first quarter number, the construction giant reported loss before interest and tax of ₦0.3 billion in the first half of 2020, don from ₦7.7 billion in 2019.
Analysts said while net finance cost continues to drop on the back of deleverage, Julius Berger reported FX acquisition loss of N0.5 billion due to currency adjustment in the quarter.
Vetiva said owing to this, the company reported a loss before tax of ₦2.6 billion
On the positive side, analysts said Julius Berger’s cash position improved from ₦7.2 billion at the end of the first quarter to ₦12.8 billion at the end of Q2.
This was driven by stronger cash collection from customers, in spite of a ₦2.6 billion cash exit in the form of dividend payments.
Vetiva noted that strong cash position is especially important for Julius Berger’s earnings as they tend to rely on expensive short-term financing to fund working capital when cash coffers moderate.
Earnings to recover post Q2 slump:
Analysts at Vetiva Capital noted that while Julius Berger recorded a loss position in H1’20, the drivers were largely external.
“Thus, with relative stability and gradual economic recovery expected in the second half of the year, we now forecast a mild earnings recovery for the financial year”, Vetiva remarked.
Read Also: Julius Berger slashes proposed dividend payout to shareholders
Analysts said looking at the revenue of cement majors, the firm observed a gradual recovery in construction activity at the tail end of Q2 and expect this to be sustained or improve till the end of the year.
Vetiva forecast revenue of ₦124.4 billion for second half of 2020 as against ₦102.1 billion in the first half, taking full year topline to ₦226.5 billion.
Accounting for increased inflationary pressure and reflecting the FX loss incurred, Vetiva said it expects EBIT margin to shrink by 5 percentage point year on year to 1.7%, taking full year EBIT 81% down to ₦3.9 billion.
Overall, Vetiva Capital forecasts a full year 2020 PAT of ₦1 billion, a recovery from the loss position in H1, albeit down 89%.
“We value the company at a target price of ₦32.06”, Vetiva stated.
Julius Berger: FX Losses, Inactivity Deflate Earnings Performance
