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JULIUS BERGER NIGERIA PLC UPDATE - Finance costs derail Q3 earnings

• Noting the size of FG CAPEX release that followed budget passage in May (₦750 billion reported at end of September), we were expecting to see considerable improvement in building and construction activities in Q3, just in line with historic trend. Although we had anticipated a strong topline on the back of this, JBERGER Q3 revenue however came in much stronger as revenue over the 3-month period came in at ₦46.5 billion (Vetiva: ₦33.0 billion), a jump from the ₦19.1 billion recorded in Q2. Whilst gross profit surged 130% q/q amidst modest rise in cost of sales, EBIT growth was capped at 60% q/q to ₦3.6 billion (Vetiva: ₦2.8 billion), due to increase in admin costs (as a % of sales) to 17% (Q2: 14%). Similar to Q2 however, bottom-line over the quarter came in negative (₦3.3 billion) as financing costs (₦5.5 billion) continued to bite earnings; net FX related costs alone accounted for ₦3.5 billion (Q2:₦.5 billion).
• Whilst we revise our FY’16 revenue forecast upward to reflect the better than expected Q3 topline, we have left our post-FY’16 revenue forecasts unchanged as we remain wary of increasing competition in the Nigeria Construction sector, particularly from Chinese construction companies with growing presence across the country. We also note that most of the recently signed multi-billion MOUs at State and FG levels were reportedly awarded to some of these Chinese companies. We believe this increasing competition could cap JBERGER’s future revenue growth. Also, given the persistent naira weakness, we believe more FX related costs could be incurred in Q4. Coupled with pressure from interest on bank overdraft, we expect finance charges to remain on the high side in the near term. As such, whilst we revise our FY’16 EBIT higher to ₦14.5 billion (₦12.9 billion), we expect FY’16 Loss-After-Tax to widen to ₦5.3 billion (9M’16: ₦3.3 billion), largely weighed down by high finance charges. Our target price has been revised downwards to ₦26.66 (Previous: ₦28.65). We maintain a SELL recommendation on JBERGER.