Hard Times Fall on Julius Berger, Other Construction Companies

Heavyweight firms like Julius Berger and other construction companies are not spared of the raging economic recession that has plagued Nigeria since the President Muhammadu Buhari government took over in 2015.

Construction stocks are not feeling the impact of the federal government’s acclaimed expenditure on the infrastructure. Julius Berger and Roads Nigeria Plc, both listed in the Infrastructure Heavy Construction sector of the Nigerian Stock Exchange have their stocks currently trading below their 52-week highs.

Julius Berger stocks close Friday at N27.50 kobo per share, below its 52-week high of N39.45 per share, though higher than its 52-week low of N23.50 per share. Roads closed at N6.60 per share. The NSE official list does not give the company’s high and low price in the last 52 weeks. Since the beginning of the year, Julius Berger’s has returned a negative 1.84% almost mirroring the performance of the stock market itself. Julius Berger is almost synonymous with road construction in the country and big ticket construction projects. So it is naturally expected that if the government is spending big on infrastructure, Julius Berger stocks should be the toast of investors. But that is obviously not happening and that is blamed on the fact that the Buhari government has been big on talk on infrastructure spending but small on actual expenditure.

Buhari’s government budgeted N1.58 trillion and N2.17 trillion for capital expenditure in 2016 and 2017, but actual money released was N1.20 trillion and N1.54 trillion. Actual spend on infrastructure was even lower going by data from third party sources. Trends show that while the government has always been able to cash back 100 percent of recurrent expenditure, the cash backing and actual spending on infrastructure has always fallen short in 2016 and 2017.

 There is little optimism that the government planned capital expenditure of  N2.18 trillion in the 2018 budget will be met. A shortfall could further exacerbate the already anaemic position of construction firms that are already grappling with huge debt, cash flow problems that hindered them from purchasing more equipment to bolster earnings, and above all, monies owed to them by customers (especially Federal Government).

 “It has been very difficult for these firms because they have a lot of money they have not received from government,” said Olalekan Olabode, Head of Research at Vetiva Capital Management.

 “Of course capex spend will drive construction activities provided they get paid for job done,” said Olabode. That seems not to be the case looking at the books. Government and sundry debtors owe Julius Berger Nigeria Plc N49.83 billion in account receivables as at December 2017.

 A prompt payment of this amount would improve the cash flow position.

 Julius Berger’s closing price of N27.50 on June 29 2018, is less than half of its an all-time high share price of N76.69 as of June 27 2014 before the economic downturn of 2016 and early 2017, showing the stock has taken a serious beaten in the last three years despite the acclaimed improvement capital expenditure spend.

 Before the economic recession that dampened government revenue, Julius Berger recorded a record profit of N16.14 billion in 2014.

 However, a combination of foreign exchange losses brought on by devaluation of the currency, receding sales and rising costs saw bottom line nosedive till it hit a loss of N1.49 billion in 2016.

 Julius Berger spent N580.15 million on the acquisition of property plant and equipment in 2017, this compares with N22.13 billion expended in 2013, which means it has slowed down on acquisition of fixed assets perhaps because it has enough or because it has got no need to expand its equipment base, which will also mean it has little job to do.

 The construction giant could have recorded a disappointing result in 2017 save waning devaluation risk and strategic plans carried out by management and board of directors that resulted in the income from sale of assets. The company made a profit of N2.57 billion for the year, a reversal of the N3.82 billion loss incurred in 2016.

 “My take is that government is going will release a reasonable percent of capital expenditure given the election year, and with this spend we should expect improvement in their revenue, which will translate to improved profitability,” said Johnson Chukwu, managing director/CEO of Cowry Assets Management.

 “Investors will price into their stock price the expected growth in revenue. The ministry of works has at different times come up with the idea of converting those receivables to bonds that will now be issued to public at maturity,” said Chukwu.

 There means light may be at the end of the tunnel for operators in the construction and real estate industry.

 The Federal government recently remobilised Julius Berger to start work on the Lagos Ibadan Express Way, and it was gathered that the firm is expecting some payment following the signing of the 2018 Appropriation bill.

 Julius Berger and Reynolds Construction Company had threatened to abandon the project over poor funding.

 Early last year, Minister of Power, Works and Housing, Babatunde Fashola, complained that the budget for Lagos-Ibadan Expressway was reduced by the National Assembly from N31 billion to N10 billion.

 The company’s first quarter 2018 result gives investors some reason to hope. The company’s revenues came in at N35 billion while profit after tax for the first three months was N1.49 billion, almost half of its 2018 full year profits and reversal of the N427 million loss incurred in the same period of 2017.