FX Related Costs Bite Harder On Earnings of Julius Berger Nigeria Plc

Proshare

Friday, August 05 2016 1:55pm /Vetiva Research 

·         FX related charges drag Q2 into loss

·         Weak Q2 bottom-line mutes strong profitability over the quarter

·         FY’16 earnings forecast revised lower following disappointing H1

·         Valuation revised slightly lower amidst pressure on FY’16 earnings


JBERGER reported a 94% y/y drop in H1’16 PAT to N136 million after FX pressure took a heavier toll on earnings in Q2. The 3-month period alone generated a loss-after-tax of N114 million, impaired by FX related charges of N4.1 billion (Q1: N3.0 billion).

The Q2 loss overshadowed improved EBIT during the quarter. At 16%, Q2 EBIT margin is the highest in recent years. Key factors behind the record margin are moderation in Cost of Sales (Q2: 73%, Q1:75%), profit from sales of some fixed assets (N458 million), and the continued impact of the cost cutting initiatives by management with Admin expenses down 30% q/q.

We recall that JBERGER effected a 39% downsizing in staff over the course of FY’15, and believe this would have played a part in keeping OPEX in check.

Tough macroeconomic landscape weighs further on operations
Asides the persistent FX pressure, other major challenges that weighed on earnings in Q1 remained paramount in Q2. One, revenue remained under severe pressure as the prolonged delay in the passage of the 2016 budget led to a dearth of capital projects from the Government. Q2 revenue was down 33% y/y to N19.1 billion – lowest quarter revenue since Q3’07, whilst cumulative H1’16 revenue declined 39% y/y to N47.8 billion, 23% behind our estimate.

Since the passage of the budget in May, budgetary releases have been thin with only Q1 CAPEX funds released so far. Nonetheless, we expect this to still provide some uptick in Government-sponsored construction activity in H2 from the abysmal H1 levels. Another challenge is that payment for FG contracts already executed continues to drag due to challenging Government revenue.

JBERGER’s contract receivables rose from N63 billion in Q1 to N72 billion as at end of Q2. As a result, the need to augment working capital with short term financing persisted in the 3-month period even as cash flow from operations remained negative, just as in Q1.

We are aware that JBERGER has resumed operations on some projects which the company had earlier suspended due to inadequate mobilization from the FG. Although this somewhat suggests that there might have been some resolution on the outstanding contract payments, we choose to be cautious in our view for the second half of the year.  

Valuation revised slightly lower amidst pressure on FY’16 earnings
We think it would be quite tough for JEBERGER to meet our revenue estimate for the year following the weak H1’16 performance. As such, we revise our FY’16 revenue to N113.7 billion (Previous: N137.8 billion).

After adjusting our model to incorporate other views including management’s strong hold on OPEX, we cut our FY’16 PAT estimate to N0.7 billion (Previous: N2.7 billion), to be largely weighed down by FY’16 Net finance charges (FX-related charges and interest on overdraft) which we estimate at N11.5billion (H1’16: 7.1 billion).

Our target price has also been revised downwards to N28.65 (Previous: N29.73). We maintain a SELL recommendation on JBERGER.



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