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JULIUS BERGER PLC H2'20 - Earnings capitulate to FX pressure

Yesterday, Julius Berger released its half-year earnings, reporting a Loss after Tax (LAT) of ₦1.9 billion in H1’20, down from a ₦2.8 billion PAT in H1’19 and below our ₦0.7 billion PAT expectation. We note 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. Although, earnings results from key cement producers show a gradual recovery in May and June post-lockdown, we believe that the hit from minimal activity in April dragged Julius Berger’s topline. 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.

On the positive side, 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. A 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

We note 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. Looking at the revenue of cement majors, we note 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. Thus, we forecast a H2’20 Revenue of ₦124.4 billion (H1: ₦102.1 billion), taking FY’20 topline to ₦226.5 billion. Accounting for increased inflationary pressure and reflecting the FX loss incurred, we expect EBIT margin to shrink by 5ppts y/y to 1.7%, taking FY’20 EBIT 81% down y/y to ₦3.9 billion. Overall, we forecast a FY’20 PAT of ₦1.0 billion, a recovery from the loss position in H1, albeit down 89% y/y. We value the company at a target price of ₦32.06.