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JULIUS BERGER PLC FY'20 - On track for an FY'21 recovery

Q4 recovery pushes bottom line into positive terrain Julius Berger released its unaudited FY’20 results yesterday, reporting a sharp recovery in earnings from the weaker first half of the year. While the construction giant had started the year on a strong foot, reporting a ₦0.4 billion PAT in Q1, a sharp drop in construction activity in the second quarter – due to the lockdowns initiated to control the spread of the COVID-19 virus – saw the company report a ₦2.3 billion LAT in Q2’20, taking H1’20 bottom line to a loss position of ₦1.9 billion. Even as construction activity picked up in the second half, Q3’20 bottom line still printed at a loss, with inflationary pressure and FX losses due to currency devaluation driving a loss of ₦50.6 million. That said, amid stronger cost containment in the final quarter and a smaller loss on material acquisitions in foreign currency, JBERGER reported a Q4 profit figure of ₦3.3 billion, taking FY’20 bottom line to a profit position of ₦1.4 billion, albeit still 87% lower than FY’19 PAT of ₦10.3 billion.

Breaking down the result, Revenue came in 8% lower y/y at ₦242.5 billion, barely 2% off our ₦237 billion estimate. The drop in topline was largely driven by a 33% y/y fall in construction revenue in Q2’20, as lockdowns and social distancing protocols hindered progress on construction activities. The lower scale as well as inflationary pressures on topline also dragged EBIT margin 3ppts lower y/y to 5%, with absolute EBIT falling 44% lower y/y to ₦11.5 billion, albeit sizeably ahead of our ₦6.5 billion expectation. While management had mentioned that it was taking some measures to mitigate cost pressures, we had not expected them to produce results as quickly as they did, with gross margin and EBIT margin expanding quicker-than-expected in Q4.

Public infrastructure focus should push revenue recovery The cement and construction sectors in Nigeria proved unexpectedly resilient in the face of a global pandemic in 2020, thanks to a surge in public and private sector cement demand. According to Zainab Ahmed, Federal Minister of Finance, the FG disbursed over ₦1.8 trillion for Capex in 2020, the highest in over a decade, even in the face of revenue shocks. The start of the AfCFTA is expected to prompt further capex disbursement in transport infrastructure, pushing cement sales and construction activity higher in FY’21. On the back of this, we forecast a 10% y/y growth in topline for JBERGER to ₦266.7 billion in FY’21, hinging on the strong relationship between JBERGER management and the FG. We remain cautious on cost management gains and forecast a conservative 90bps moderation in EBIT margin, taking EBIT 30% higher y/y to ₦14.9 billion. After accounting for interest and tax, we forecast an FY’21 PAT of ₦7.4 billion, up from our previous estimate of ₦6.5 billion. Having adjusted our model for FY’20 actuals and taken into account current interest rate environment, we now value JBERGER at a 12-month TP of ₦36.53, a sharp increase from our previous TP of ₦27.66. We place a BUY recommendation on JBERGER.