Julius Berger Plc is without a doubt one of Nigeria’s biggest construction company and a major contractor with the Federal Government. In the last five years alone the company has generated over N686b in revenues with over 95% coming from construction contracts alone. In the first 9 months of 2012 the company posted revenue of N137.4b 5.6% higher than the N130b it posted same period last year. Gross Profit wasN31.4b representing a 22.9% gross profit margin slightly lower than the same period last year. At N22billion, operating expenses as a percentage of Gross profit was a whopping 72%. Operating profit at the end of the period was N8.9billion, 9.3% higher than same period last year.
Ordinarily, a result like this may seem abysmal considering the huge cost and low margins associated with it. But JB operates a unique model as one would expect from a construction giant. It basically uses other people’s money to fund its operations and does so efficiently. Out of its total assets of N186b only N10.9billion of that is financed through equity. External loans, trade and other creditors make up the balance. As such to post not just profits but high returns on shareholders funds, a lot will have to depend on how it manages its debtors and creditors. The company posted a pretax profit of N7.4b representing a return on equity of 40%!!!!
For a company with a external debt 10times more than equity, such high ROE’s can only be possible if interest are not just below return on assets but nearly close to zero. Finance charge of N1.45billion only represents an average interest of 1.25% 4 times lower than it’s return on assets. This here is a perfect example of how the efficient use of debt can be used to increase shareholder value. Truth be told, I do not know where in this world one can borrow as such low interest rates. A look at their financial statements reveal so little leaving one to wonder if this is some magic.
JB’s market price per share of N29 is not its lowest this year having sold at N22 back in february. A year ago it was N38 16.6x it’s earnings per share at the period. Todays N29 price is about 9x earning per share.
Julius Berger 2012 9 months audited accounts is posted on the website of the NSE