Friday, May 27, 2011, Vetiva Research
This report captures our view of the construction industry in Nigeria, essentially from an analysis of the intrinsic long term potentials of the sector, which we believe is gradually being unlocked. Please find attached and see highlights below;
The next in line…?Amongst others, United Arab Emirate (UAE)’s oil fuelled growth and China’s industrial/export - driven economic growth, led to significant rise in construction activities in these economies over the last decade. Nigeria recently crossed the 7% growth rate, and has innate potentials to attain higher growth levels. This, coupled with healthy revenues from strong oil prices and increasing investors’ interest in bridging the infrastructure deficit brings one question to mind- is Nigeria next in line for a construction boom? Without being unrealistically optimistic, we strongly believe the next decade will provide a positive answer to this question.
Latent opportunities: Across board, be it road/bridges, rail, ports, or real estate, the opportunities are enormous but latent. In real estate for instance, the demand for commercial real estate in Lagos is ever rising – office rent in Lagos ranks 5th highest globally (according to Knight Frank Research). More than 70% of the households are single rooms, mostly in urban slums and rural areas. In rail transportation, about 77 million tonnes of goods is transported per kilometre of railway per annum - a far cry from frontier market average of 52.4 billion tonnes. In almost every yardstick of measuring infrastructural development, especially in transportation and real estate, Nigeria lags most peers in the frontier and emerging markets. The constraints have been overemphasized, we think, thus shadowing the opportunities waiting to be explored.
Risks…not as bad: Nigeria’s operating environment, no doubt, has major constraints, both from a policy and politics point of view. Notwithstanding, Nigeria compares quite commendably relative to the big emerging markets – India, China and Brazil in some key metrics employed by the World Bank to compare general business environment, for the construction industry. One of such metrics is “dealing with construction permits” in which Nigeria ranks 167th (out of 183 economies) compared to India (177th), China (181th), Russia (182th), according to World Bank 2011 Ease of Doing Business Survey. Though, the constraints in Nigeria are very inherent, comparatively, we think the risks mayhave been overstated.
Our only pick:Our favourite quoted company in the construction sector is Julius Berger Nigeria Plc, given its sound fundamentals in the industry. Based on our DCF valuation target price of
N64.15, we place an Accumulate rating of the stock in view of a potential return of 15% relative to its current price of N55.71.