Summer 2020 is here, and without the interference of COVID-19, this would have been one of the busiest summers in history. For the first time, we had a European Soccer Tournament hosted across different countries in Europe. Spain, Holland, Romania, Denmark, Hungary, Ireland, England, Russia, and a few countries, to mention a few, are all in line to host the world for this spectacular tournament. Many people (including myself) were planning on trips to Europe to watch some of the tournament’s exciting games. Another tournament scheduled to hold in Tokyo this summer was the 2020 Olympics. Think about what that would have meant for the Asian markets. Think about the demands that would have generated across the board.
The Dubai Expo 2020, a once in a lifetime event, was going to be the largest ever celebration hosted in the Emirates. The event was primed to welcome 190 participating countries and millions of visitors from across other continents. Think about tourism to Dubai usually, think about tourism to Dubai if this event were to hold (without COVID-19), and now think of it not even holding at all.
The demand for travel was primed to reach its zenith this year. That would have meant a lot for the aviation industry, airlines, and, most importantly, Oil markets. Now we have Oil markets leeching on a relatively insignificant demand for travel. Jet fuel demand averages about 8 million barrels per day. As a result of the pandemic, The International Energy Agency expects demand for jet fuel and kerosene to fall by 2.1 million bpd on average in 2020.
According to an article in Reuters, Per Magnus Nysveen, Head of Analysis at Rystad Energy said, “Jet fuel consumption will be impacted for a longer time and maybe not recover fully even next year. The reason is that travelers remain concerned about long-haul vacations, and businesses get used to online meetings”.
We are now faced with a travel industry that is more precautionary of a virus, so this means fewer travels and social distancing in aircraft. Although a few people are acting oblivious to the pandemic by carrying on with their summer plans, travels are still below pre-pandemic levels. American Airlines and United Airlines have also decided to ditch social distancing, as seen in an article on Forbes. American Airlines said in its press statement last week.
“As more people continue to travel, customers may notice that flights are booked to capacity starting July 1. American will continue to notify customers and allow them to move to more open flights when available, all without incurring any cost,” Nysveen added.
Albeit, that statement caused a lot of criticism from some members of the public, it is evident the airline is trying to salvage some revenue after the dilapidating effect the pandemic had on the airline industry just as the pandemic hurt Oil markets.
Now the Oil markets need airlines to rally. In the diagram below, some resistance is formed above the $43 mark, albeit worries over a second wave of the coronavirus surfacing in most American cities. A massive sell-off happened at Wall Street last week on the back of these concerns. The Oil bulls need momentum to reach the $50 price level, and that would only be possible if airlines resume in full capacity.
The markets have reached their current levels on the backdrop of OPEC production cut and hopes of a reopening economy. If airlines begin to operate pre-pandemic capacity, we would be in store for a rally in prices. But when would airlines begin operating at pre-pandemic capacity? That remains the question the Oil markets have no answer to.
Julius Berger’s rebound contingent on full economic bounce back
Julius Berger’s construction portfolio includes infrastructure, industry, building, and facility services solutions.
Due to the COVID-19 pandemic as well as the economic impact of the measures put in place to slow the spread of it, many industries have experienced slower growth. The construction industry was not left out. According to reports by GlobalData, the construction output growth forecast for Sub-Saharan Africa (SSA) has been revised to 2.3%, down from the previous projection of 3.3% (as of mid-April) and 6.0% in the pre-COVID-19 case (Q4 2019 update).
The reason for the contraction was noted by GlobalData to be as a result of the global slowdown and the outbreak of COVID-19 in the region. Other factors responsible include economic headwinds such as inflation, spending cuts, widening fiscal slippages, suspension of certain projects and more that could disrupt the construction sector. This contraction is projected to be 4.3% in South and Southeast Asia while France is expected to shrink by 9.4% in 2020.
Leading Construction Company, Julius Berger, had foreseen the contraction in the industry and commenced efforts to mitigate its impact and cushion the blow. One of such efforts was the reduction in dividend pay-out. After initially announcing a dividend pay-out of N2.75K per 50K share for the financial year ended December 31, 2019 and a bonus of 1 (one) new share for every existing 5 (five) shares held, the company eventually recommended a final cash dividend pay-out of N2.00K per 50k share.
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It noted that the Group had “carefully considered the emerging social, operational, financial and economic impact of the COVID 19 pandemic, the outlook for Nigeria for the financial year 2020, and the impact on the business and cash flows of the Group.”
The company’s fears have been confirmed by its recent financials which, among other negatives, showed huge foreign exchange losses of N3.102 billion in the first half of 2020.
Q2 was the hardest
Julius Berger’s construction portfolio includes infrastructure, industry, building, and facility services solutions. With companies and nations alike revising scheduled capital expenses as a result of the shrinkages in product demand (owing to global quarantine measures), uncertainties around supply logistics as well as supply of materials, the company had gotten hit. Q1 had its own issues, but Q2 birthed a new dimension of challenges for the company.
Revenue was down 33% from N68.9 billion in Q2 2019 to N46.1 billion in 2020. There was also a huge loss in profit after tax of around 200% from a profit of N2.3 billion in Q2 2019 to a loss of N2.3 billion and this can be attributed to lower revenue, and increased losses from the company’s many investments.
Exchange difference on translation of foreign operations for the quarter alone increased by 227% to N1.4 billion in Q2 2020 from N438.5 million in the comparative quarter.
Outlook for the company and for investors
The disruptions the construction industry is currently experiencing is expected to continue for the medium-long term. Reports by Beroe Inc., a procurement intelligence firm, reveal major concerns that companies in the industry will witness profits being hurt and may even incur losses on a number of projects.
Companies having worldwide supply chains could see tier 2 and tier 3 suppliers highly affected by disruptions related to the pandemic. Worse off, it explains that construction materials like “steel, wood, plaster, aluminum, glazed partition systems, cement and cementitious products, paints, HVAC equipment, electrical equipment, and light fixtures from China are expected to be delayed.”
For the company, cost-cutting has never been more important. While there are a series of strategies it could explore to augment the challenges, its growth right now depends largely on the speed of global economic recovery. This is because both the company’s input needs as well as its output in terms of the recommencement of projects, depends on the speed with which business as usual commences and the amount of time it takes for the industry to find a new balance for its operations.
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For investors, however, this presents a long term opportunity. Julius Berger currently trades at N15.05, falling 44.26% just within the last 3 months. The share price is also on the downside of its 52-week range (N14.42 and 22.92) and its price-to-book ratio of 0.6331 shows that the stock is undervalued.
While the company’s EPS is currently low at N2.52, investors who are willing to wait the time could find a gem in the stock particularly with the increased infrastructural needs born out of the population expansion which is taking place in many parts of the world in the years to come.
Power: Nigeria’s deal with Siemens – the birth of a new era?
Siemens’ position in the power value chain remains unclear given the huge investment it is committing.
Recently, the Minister of Power, Sale Mamman disclosed that the power deal between Nigeria and Siemens AG, a renowned German firm, will lead to the upgrading of 105 power substations and construction of 70 new substations across the country. The Minister also disclosed that the Federal Government had made an initial N8.6bn commitment in the transaction. We recall in July 2019, Nigeria and Siemens signed a power sector deal which provides a blueprint on improving power generation and fixing the archaic transmission and distribution infrastructure in the sector. Notably, the president set a goal of achieving 7,000MW and 11,000MW of reliable power supply by 2021 and 2023.
Siemens’ position in the power value chain remains unclear to us given the huge investment it is committing to make. Currently, the Transmission Company of Nigeria (TCN) is 100% owned by the government while the Gencos and Discos are privately controlled. While we see a possibility of Siemens getting a stake in TCN, we struggle to see how that will work for the discos and gencos given that Siemen’s huge invesments may mean they have to cede
control. Also, government’s desire to maintain a stranglehold on the power sector in bid to regulate electricity tariffs remains a key risk to any investment in the sector. We are also sceptical on Siemen’s ability to recoup its investment given that the liquidity squeeze in the sector attributable to non-cost reflective tariffs remains unresolved.
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Over the years, the widening deficiency in on-grid supply of power has forced consumers into costly off-grid alternatives, which account for 52% of electricity consumption, based on IMF estimates. According to the world bank, about 80 million people still lack access to grid electricity, making Nigeria the country with the largest access deficit in Sub-Saharan Africa. The institution further puts the national electrification rate at 55%, with rural electrification rate at a meagre 39%. Clearly, a lot of work is required in improving the supply of power across the country and ensuring its availability to unserved and underserved households and businesses.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
No trophy for International Breweries after bland Q2 results
Brewing companies have found few and fewer opportunities to consolidate and generate quality turnover.
International Breweries Plc closed with a net loss in the second quarter (Q2) of 2020. They made a revenue of N25.3 billion, 28.5% shy of their achievements in the opening quarter (Q1) of the year.
Cost of sales consumed virtually all the revenue generated, taking as much as 86% in Q2 and 82.5% in Q1. This has been the sad trend/trajectory for International Breweries which ultimately almost guarantees that they close their books with a loss.
International Breweries Plc is a brewery company in Nigeria with its flagship product being the Trophy Bottle. Other products include Hero Lager, Eagle lager, Eagle Stout, and Beta malt. They have managed to improve revenue but haplessly struggles with rising costs of production and expenditures. The effect of government regulations, with the new excise duty implemented in 2018 hasn’t been palatable. Brewery companies generally do not have the luxury of tweaking their prices at any point in time to improve their topline. This is as a result of the immense sensitivity of the industry where increasing the price of a bottle instantly delivers the customer to the competition, albeit on a silver platter.
COVID-19 stalled operations and interrupted the accustomed seamless flow of activities around the world. Brewing companies have found few and fewer opportunities to consolidate and generate quality turnover. April 2020 ushered in a lockdown of vehicular movements and operations across major cities in the country. Bars, Clubs, Weddings, and other avenues for merriment, which hitherto are hubs for amassing turnover were given secondary attention until further notice. For companies in the industry, sales ordinarily would plunge, in light of these factors. Whilst we acknowledge and recognise the negative impacts the pandemic has wrought, it isn’t entirely accurate to allot all of International breweries travails to this.
International Breweries, with the figures generated appears, nears its demise. Retained earnings for H1 showed a negative of N12.2 billion, this suggests that the company has made consistent losses. It also has borrowings amounting to over N107 billion naira secured by corporate guarantee with interest ranging between 7%-13%. And with the ever-increasing negative value for retained earnings, death has been slow but consistent and almost inevitable.
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The statement of cash flow for H1 2020 exposes the true sources of cash inflow for International Breweries Plc. Only 5% were derived from operations, 0.8% from investing activities, and over 90% representing N162 billion from financing activities particularly rights issues.
International Breweries is in sinking sand and must devise new solutions quickly if it entertains any hopes of prolonging its longevity.