Monday, November 13, 2017 3:35 PM / Vetiva Research
· Reported a mild profit in Q3’17
· Operating expenses remain a pressure point
· Stable currency market sustains lower FX acquisition losses
· TP revised to ₦24.91 (Previous: ₦24.79)
Reports Loss-After-Tax but exceeds estimates
JBERGER reported a mild profit (Q3’17 PAT: ₦16 million; Q2’17: ₦72 million) for the second consecutive quarter as the construction company continues to recover from its recent earnings slump; FY’16 LAT at ₦3.8 billion, Q1’17 LAT at ₦0.4 billion. Supported by the modest recovery in Q3’17, 9M’17 bottom line came in at a ₦350 million loss, better than Vetiva LAT estimate of ₦454 million and a significant improvement from 9M’16 LAT of ₦3.3 billion.
Whilst the modest bottom line surpassed Vetiva expectation, topline (₦105 billion) and gross profit (₦27 billion) printed below our estimates of ₦109 billion and ₦28 billion, albeit 12% and 9% higher y/y respectively. Despite the miss, 9M’17 EBIT (₦7 billion) came in ahead of our ₦5 billion estimate – supported by lower-than-expected Operating Expenses (9M’17: ₦23 billion vs. Vetiva estimate: ₦25 billion).
However, the company recorded FX acquisition losses of ₦3 billion for the period - 7% higher than our ₦2.9 billion estimate. Having said that, supported by a more stable FX environment, FX loss came in more contained in Q3’17 at ₦341 million (vs. Q1’17: ₦627 million and Q2’17: ₦2.1 billion).
Financing costs however remained a pressure point in Q3’17. The cost line rose 161% q/q to take the 9M’17 number to ₦3.4 billion (25% worse than we had expected and 41% higher y/y). The spike in Finance expenses was largely driven by an increase in short term borrowings as the company increased debt in a bid to support working capital. Notably, JBERGER’s cashflow from operations has remained negative since Q1’16 as cash collections for FG contracts executed remains quite challenging in the Nigerian construction sector.
Estimates revised higher; Target price increased to ₦24.91
We anticipate a stronger top line run rate in the last quarter of the year as the Federal Government (accounts for significant portion of revenue) further ramps up its capital expenditure supported by the recent release of the ₦100 billion Sukuk proceeds for road projects. Hence, despite the revenue miss in 9M’17, we maintain our FY’17 revenue estimate at ₦149 billion.
In line with the contained Operating Expense observed in Q3’17 (OPEX as % of sales: 21% vs Q2’17: 25%), we cut our Q4’17 estimate to reflect the Q3 run rate and forecast an OPEX of ₦30 billion (Previous: ₦33 billion). We however expect finance cost to remain elevated. Pending any notable improvement in cash collection across the industry, we expect JBERGER to remain heavily dependent on bank short term facilities, consequently keeping interest costs high.
we revise our FY’17 finance expenses (including FX losses) higher to ₦8.7 billion (Previous: ₦8.1 billion, 9M’17: ₦6.5 billion). Overall,
we revise our bottom line forecast for FY’17 to ₦648 million profit (Previous: ₦1.4 billion loss) –
supported by a ₦998 million profit
expectation for Q4’17 standalone. Our target price is raised slightly to ₦24.91 (Previous: ₦24.79). We maintain a
SELL on the stock.