Julius Berger needs to cut cost now or lose profit for the second year

Despite budget delay and the slow rate of capital projects releases, Julius Berger achieved reasonable growth in revenue in the first quarter. The construction company however needs to keep cost under control, failing which a more rapid drop in profit may be expected in the current financial year.

The company saw a sharp slowdown in revenue growth and a profit decline in 2013. This year, turnover is headed for a decline at current growth rate. This could lead to a more rapid drop in profit unless Engr. W. Goetsch, the company’s  managing director/chief executive officer takes effective steps to cut down administrative expenses.

A 20% growth in turnover produced only a 5.2% improvement in net profit for Julius Berger at the end of the first quarter. The critical weight on the bottom line is administrative cost that has significantly increased its share of turnover since last year. At the end of the first quarter, administrative expenses grew by more than 160%. It accounts for the difference between a 120% jump in gross profit and only a 26.8% increase in operating profit.

The company’s first quarter operations ended with a turnover of N47.69 billion. This is a reasonable increase of 20.3% over the first quarter figure in the preceding year. If the first quarter growth rate is maintained to full year however, turnover is expected to be in the region of N195.2 billion for Julius Berger in 2014. This will be a decline of 8.2% from the turnover figure of N212.74 billion the company posted in 2013.

Revenue growth is likely to step up in the in subsequent quarters, as capital projects disbursements increase. Turnover growth decelerated sharply from 20.4% in 2012 to 5.5% in 2013. The growth in 2012 was partly a recovery from a drop in 2011. The company needs to step up revenue growth to enable it manage the effect of rising cost on the bottom line.

The company reported an after tax profit of N1.31 billion in the first quarter, which is a moderate increase of 4.8% over the corresponding figure last year. Based on the first quarter growth rate, net profit is projected at N5.7 billion for Julius Berger at the end of 2014. This will be a drop of 27.4% from the net profit figure of N7.85 billion posted in 2013.

The company’s after tax profit had slipped by 2.0% in 2013 from the peak earnings record of N8.01 billion in 2012. Earnings records show a pattern of rise and fall in profit and the current year looks like one of a major drop.

Profit weakness in the current year reflects a decline in profit margin. Net profit margin is down from 3.1% in the first quarter of last year to 2.7% this year. It is also a significant drop from the 3.7% net profit margin achieved in the 2013 full year. It is a continuing decline from a net profit margin of about 4.0% at the end of 2012.

Rapid growth in administrative expenses account for the decline in profit margin and the slow growth in profit. At the end of the first quarter, administrative cost advanced by 160.5% to over N8.0 billion year-on-year compared to the 20.4% improvement in turnover. It claimed a significantly increased share of turnover from 7.7 to 16.8% over the period.

The rapid growth in administrative expenses prevented cost savings in other expense lines from getting down into profit. For instance, the company saved good revenues from cost of sales, which moderated relative to revenue during the review period. Cost of sales grew by 7.7% to N37.93 billion in the first quarter, representing a reduced proportion of turnover at 79.5% compared with 88.8% in the corresponding period last year.

This permitted a rapid growth in gross profit at 120% to N9.76 billion during the review period, which raised gross profit margin from 11.2% to 20.5%. The high growth in administrative cost prevented the cost saving in cost of sales from flowing down into the bottom line. It makes the difference between the outstanding growth in gross profit and an improvement of 26.5% in operating profit during the review period. A decline of 9.5% in net finance income and a rise of 35.4% in income tax expense lowered the growth of net profit further to 4.8%.

The company earned 99 kobo per share at the end of the first quarter based on the bonus induced increased volume of shares for the current year. This is a decline from N1.11 earnings per share in the corresponding period last year. Full year earnings per share is projected at N4.32 for Julius Berger at full year, which will be a drop from the N6.72 earned in the 2013 full year.

The company has proposed a cash dividend of N2.70 per share and a bonus of 1 for 10 for its 2013 operations. The company’s books closed between 2nd – 6th June while payment is scheduled for 21st June 2014.

Significant changes in the company’s balance sheet from the end of last year’s position include a drop of 40.3% in cash and bank balances to N12.23 billion, an increase of 10% in short-term borrowings to N21.24 billion and a drop of 25.6% in long-term debts to N4.79 billion. Cash flow difficulties facing the company worsened in the first quarter with a net cash consumed by operating activities rising from N3.45 billion in the corresponding quarter last year to N10.58 billion this year. With net cash utilization in both investing and financing activities, the company ended the first quarter with a net decrease of N13.60 billion, higher than the net decrease of N6.4 billion in the same period last year.

For Goetsch to prevent a profit decline in 2014, he will need to grow the bottom line at a significantly faster rate in the remaining quarters than recorded in the first quarter. He will have to post an average of N2.18 billion after tax profit per quarter for the remaining three quarter of the year. In order to accomplish that, he will have to jerk up net profit margin from 2.7% in the first quarter to 4.0%.

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