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JULIUS BERGER PLC - Cost pressures, FX losses sting Q1’17 earnings

JBERGER kicked off the 2017 financial year on a weak note, reporting a loss-after-tax of ₦427 million for Q1’17 compared to the ₦951 million profit reported in the corresponding period of 2016. The reported bottom line also came in weaker than our ₦805 million profit expectation. Whilst the quarter’s topline grew mildly by 3% y/y to ₦34 billion (much in line with our ₦33 billion estimate) amidst the usual delay in budget passage (impacting capital releases), the main deviation from our estimates came from operating costs. Particularly, OPEX rose 29% y/y to ₦7.4 billion – translating to an OPEX to Sales ratio of 22% (Q1’16: 17%, Vetiva: 15%). Pressured by the elevated operating costs, Q1’17 EBIT declined 36% y/y to ₦1.8 billion (Vetiva estimate: ₦2.6 billion) – translating to an EBIT margin of 3% (significantly below the 5-year average of 10% and our 12% expectation). Further dampening the 3-month results and effectively dragging bottom-line to a loss (like the last two quarters of 2016) was a Foreign Exchange acquisition loss of ₦2.1 billion.

The delay in the passage of the budget so far suggests that 2017 is shaping up to be a repeat of 2016. As such, we expect to see much faster capital releases in the second half of the year. That said, we maintain our FY’17 revenue estimate at ₦148.8 billion. Whilst we await JBERGER’s Investors Relations Forum (May 9) for further clarity on the surge in operating costs, we have assumed the high cost ratio recorded in Q1’17 in our model. As such, we cut our FY’17 EBIT estimate to ₦8.2 billion (Previous: ₦17.9 billion). Also, we maintain that the improving liquidity of the FX market amidst successive CBN interventions in the FX market since February would help trim Foreign Exchange acquisition loss in the coming quarters. Overall, we revise our FY’17 PAT estimate to ₦104 million (Previous: ₦3.9 billion). After updating our model, we revise our target price to ₦25.92 (Previous ₦32.38).