Cost of Sales, FX Shrinks Julius Berger’s Profit

Kayode Tokede

Reporting five per cent and 33.4 per cent increase in cost of sales and foreign exchange acquisition, Julius Berger Nigeria Plc’s nine months ended September 30, 2023 unaudited financial result showed slowdown in profit generation.

The construction company declared N272.4 billion cost of sales in nine months of 2023 from N259.67 billion in nine months of 2022, while foreign exchange acquisition losses closed nine months of 2023 at N6.17 billion from N4.63 billion in nine months of 2022.

The N6.17 billion foreign exchange acquisition losses is on the Backdrop of depreciation of the Naira and volatility in the spot exchange rate. 

Also, from profit & loss figures, Julius Berger Nigeria declared N46.3 billion total operating expenses in nine months of 2023, an increase of 24 per cent from N11.2 billion in nine months of 2022. 

Meanwhile, administrative expenses and marketing expenses advanced by 22.4 per cent and 580 per cent to print at N42.4 billion and N612.0 million in nine months of 2023 respectively.

Julius Berger Nigeria’s Profit Before Tax (PBT), thus, appreciated by 23.8 per cent to N15.1 billion in nine months  of 2023 from N12.16 billion, while profit before tax stood at N9 billion in nine months of 2023 from N6.96 billion in nine months of 2022.

Meanwhile, the company revenue’s climbed by 7.6 per cent to N333.4 billion from N309.81 billion in nine months despite economic challenges and expected construction delays due to seasonal rains.

 The primary catalyst for the positive performance was an upsurge in public sector contracts in the period under review.

increase in revenue

The increase in revenue is attributable to increased receipts from the public sector. Income generated from government contracts increased by 13.3per cent, reaching N283.7 billion, constituting 85.1 per cent of the total revenues during the reviewed period.

Analysts at United Capital Research said, “However, in line with our expectations, revenue generated from the private sector declined by 16.2 per cent printing at N49.7billion owing to economic challenges in the Nigerian operating environment, from rising inflationary pressures to continued weakening of the Naira against major currency pairs.

“Further review of Julius Berger Nigeria’s revenue (in terms of products/services) shows that inflows from civil works continue to account for the majority of revenues, amounting to N229.3 billion (68.8 per cent of total revenue).

“Notably, revenues from diversification efforts, although still marginal (0.2per cent of total revenues) rose 6.1x to reach N665.4million.”

Julius Berger Nigeria reported N3.77billion finance costs in nine months of 2023  from N2.39billion in nine months of 2022, driven by N2.45billion interest on commercial paper and N1.05billion “other finance charges” in nine months of 2023 from N672million reported in nine months of 2022.

Meanwhile, margins remain tight due to some of the aforementioned factors. However, slight improvements were observed in the period.

Therefore, Gross margins (+2.1ppt) rose to 18.3per cent, and Net Margins (+0.5ppt) climbed to 2.7 per cent. At the same time, Julius Berger Nigeria’s leverage climbed to 52.6 per cent from 32.9 per cent in 2022financial year, raising concerns regarding potential increases in future financing costs (+58.1 per cent).

However, Julius Berger maintains robust cash and near-cash positions (N137.0billion, reflecting a 156.4per cent increase), mitigating potential downside risks. Similarly, Earnings per share rose to N5.63 from N4.35.

Outlook

Analysts at United Capital Research said, “Despite challenges in the operating landscape, our forward-looking perspective for Julius Berger Nigeria remains optimistic. We anticipate sustained revenue growth and enhanced operational efficiency to contribute to continued earnings growth.

“By the same token, the conclusion of the presidential elections earlier in the year and the new administration’s focus on infrastructure serve as a potential tailwind to drive the increase in Julius Berger Nigeria’s public sector revenue. Conversely, our optimistic forecast faces potential risks from the ongoing escalation in prices and foreign exchange volatility. This scenario could concurrently diminish revenue from private sector contracts and elevate costs for Julius Berger Nigeria.

“However, the continued success of the company’s diversification efforts, such as its cashew processing business, would serve as a hedge against FX-related risks. That said, we hold the belief that Julius Berger Nigeria will continue in capitalising on the strengths within its expanding segments and strategically managing cost fluctuations to maximise value for shareholders. Consequently, we project a N37.90/share Target Price (TP) for FY-2023, with an 8.9 per cent upside from the current price of N34.80.”