Can Julius Berger again speed up earnings in second half?

Julius Berger is unable to match its previous year’s revenue and profit numbers at the end of the second quarter but the construction company seems to have a good reserve for high earnings growth momentum in the second half. While earnings growth accelerated in the second quarter from the first quarter performance, the company still reported year-on-year decline in both revenue and profit. Can the company show a repeat performance of the high growth speed it recorded in the second half of last year is the question on Julius Berger for 2015.

The company closed the second quarter operations with a turnover of N77.83 billion, which a decline of 3.9% year-on-year and after tax was also down by 8.2% year-on-year to N2.26 billion. Going by the company’s performance last year, the company’s peak earnings season still lies ahead. Close to 60% of its full year turnover in 2014 was generated in the second half of the year. Also of its full year after tax profit of N8.24 billion, less than 30% was earned at the end of the second quarter.

Assuming that last year’s growth pattern is repeated for the current year, the year-on-year decline in earnings still looks likely to follow the company to full year. A mid way between the current growth rate and a possible accelerated growth in the second half of the year appears to be a reasonable basis for full year projections of revenue and profit for the company in 2015.

Based on the adjusted growth rate, turnover is projected at N174.6 billion for Julius Berger at the end of 2015. This will be a drop of 11.3% from the company’s revenue figure of N196.81 billion in 2014. It will also be a drop for the second year from the peak turnover of N212.74 billion the company posted in 2013. Revenue growth constraint is a reflection of the fiscal crisis facing all tiers of government since last year, which has slowed down construction works and other capital projects.

The company showed effective cost management in the face of inability to grow revenue but interest expenses remained out of control. Cost of sales moderated relative to revenue by declining at wider margin of 4.2% and that reduced the margin of decline in gross profit to 2.8% against the 3.9% decline in turnover. This was further boosted by an increase of 42.3% to N632 million in other income during the review period.

Administrative cost was flat at N14.66 billion at half year and that caused a decline of 5% in operating profit at N4.87 billion. The critical development however is a rise of nearly 61% in net finance cost to N1.1 billion year-on-year. This accounts for over 15% drop in pre-tax profit at the end of the company’s second quarter operations in June.

Interest expenses may drop at full year if the current growth rate is maintained. The company incurred a net finance cost of N4.89 billion in the 2014 full year. Balance sheet borrowings are dropping so far this year. Short-term debts dropped by 21.6% to N27.28 billion at the end of June from the closing figure last year. Long-term borrowings also dropped by one-half to N1.62 billion during the same period.

The company reported an after tax profit of N2.26 billion at the end of the second quarter, which is a decline of 8.3% year-on-year. Based on the adjusted growth rate, we project an after tax profit of N6.2 billion for Julius Berger in 2015. That will be a drop of about 25% from the full year profit figure of N8.24 billion the company reported at the end of 2014. It grew after tax profit by 5% last year from a marginal decline in 2013.

Net profit margin ticked down from 3% in the second quarter of last year to 2.9% this year, which is a sharp drop from the net profit margin of 4.2% the company recorded at the end of 2014. Inability to grow revenue and rising interest expenses are the main factors in the decline in profit margin.

Earnings per share dropped from N2.02 at the end of June last year to N1.77 this year. Earnings per share is expected to come to N4.70 for Julius Berger at the end of 2015, down from N6.13 at the end of 2014.

The company’s cash flow difficulties eased at the end of the second quarter though it remains in the negative territory. A major favourable development is a change from a large net cash utilisation of N10.53 billion in operating activities last year to cash generation of N2.26 billion. Net cash used in investing activities also dropped sharply during the same period but the company still had to borrow to meet financing activities.