Construction Industry Report - Market Analysts and Investor
Transcript of Construction Industry Report - Market Analysts and Investor
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I
May 27th 2011
This report captures our view of the construction industry in Nigeria,
essentially from an analysis of the intrinsic long term potentials in the
sector, which we believe is gradually being unlocked. On a company-
specific level, we focus on Nigeria’s construction giant – Julius Berger Plc,
maintaining an “Accumulate” on the counter.
The next in line…? Amongst others, United Arab Emirate (UAE)‟s oil fuelled
growth, China‟s industrial/export driven growth and the resultant construction
boom in these economies over the last decade, are all pointers to the high
correlation between strong economic growth and the construction industry.
Nigeria recently crossed the 7% growth rate, and has innate potential to record
higher growth. This, coupled with healthy revenues from strong oil prices and
increasing investors‟ interest in bridging the infrastructure deficit brings one
question to mind- is Nigeria next in line for a construction boom? Without being
unrealistically optimistic, we strongly believe the next decade will provide a
positive answer to this question. More than ever, the recent emphasis of all
stakeholders on infrastructural development is noteworthy – we might just be
close to seeing light at the end of the tunnel.
Latent opportunities; waiting to be unlocked: Across board, be it
road/bridges, rail, ports, or real estate, the opportunities are enormous but
latent. In real estate for instance, the demand for commercial real estate in
Lagos is ever rising – office rent in Lagos ranks 5th highest globally (according
to Knight Frank Research). More than 70% of the households are single rooms,
mostly in urban slums and rural areas. In rail transportation, about 77 million
tonnes of goods is transported per kilometre of railway per annum - a far cry
from frontier market average of 52.4 billion tonnes. In almost every yardstick
of measuring infrastructural development, especially in transportation and real
estate, Nigeria lags most peers in the frontier and emerging markets. The
constraints have been overemphasized, we think, thus shadowing the
opportunities waiting to be explored.
Risks...not as bad: Nigeria‟s operating environment, no doubt, has major
constraints, both from a policy and politics point of view. Notwithstanding,
Nigeria compares quite commendably relative to the big emerging markets –
India, China and Brazil in some key metrics employed by the World Bank to
compare general business environment, for the construction industry. One of
such metrics is “dealing with construction permits” in which Nigeria ranks 167th
(out of 183 economies) compared to India (177th), China (181th), Russia
(182th), according to World Bank 2011 Ease of Doing Business Survey. Though,
the constraints in Nigeria are very inherent, comparatively, we think the risks
might have been overstated.
The only pick: Our favourite quoted company in the construction sector is
Julius Berger Nigeria Plc, given its sound fundamentals in the industry. Based
on our DCF valuation target price of N64.15, we place an Accumulate rating
on the stock in view of a potential return of 15% relative to its current price of
N55.71.
Market Cap: N75.9Bn (US$506Mn)
Forward 2011 P/E: 9.9x
EV/2011 EBITDA: 2.5x
2011 Div Yield: 8.6%
Sector YTD perf: 5.9%
Recommendation: JBERGER
Rating: Accumulate
Share Price: N55.71
Target price: N64.15
Expected Return: 15%
)
Source: NSE, Vetiva Research
Vetiva Capital Management Limited
266B Kofo Abayomi Street
Victoria Island, Lagos
Tel: +234-1-46175213
Fax: +234-1-4617524
Email: [email protected]
Analyst
Tosin Oluwakiyesi
Construction Industry Report A Haven of Opportunities
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Vetiva Construction Sector Index
NSE ASI
YTD NSE ASI vs Vetiva Construction Index
(rebased Dec 31)
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Table of Contents
Summary ....................................................................................... 1
Nigeria Construction Sector – a dissecting look ................................... 2
Physical Infrastructure – key investment case .................................... 4
What will drive construction boom? ................................................... 8
Industry Dynamics .........................................................................10
Segments .....................................................................................15
Rail ..................................................................................15
Road and Bridges ..............................................................18
Ports ................................................................................20
Real Estate .......................................................................22
Building Materials – Impact on Construction ......................................24
Investment Summary .....................................................................30
Company Section; Julius Berger Nigeria Plc .......................................31
Appendix ......................................................................................42
Disclosure .....................................................................................45
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Nigeria’s construction sector – A dissecting look
Nigeria‟s construction sector accounts for 1.4% of its GDP (Q3‟10 est.) More important,
is the fact that despite the growth seen in the construction sector output, (7 year CAGR
of 35%, see figure 1 below), its contribution to total GDP has remained at abysmally low
levels. In 1981, the construction sector accounted for 5.8% of Nigeria‟s GDP and in the
last three decades, Nigeria‟s total GDP has risen to approximately 495 times its size. On
the contrary, construction sector GDP has only grown to 125 times its size in 1981.
Notably, the drivers of Nigeria‟s GDP over the last three decades have remained the
same – Agriculture (crop production), Crude oil production and Wholesale & Retail trade.
The construction sector is yet to realise its potentials depsite Nigeria‟s huge deficit in
infrastructure. Over the last three decades reviewed, crop production, crude oil
production and wholesale & retail trade have recorded a 27 year CAGR of 28%, 29%
and 26% respectively, while the construction sector GDP grew at a CAGR 21% over the
same period. It is evident therefore that Nigeria is way below realising its potential in
the construction industry.
Trailing major oil producers?
Oil wealth has been key to construction sector boom in major oil producing economies. In
this regard, similar less diversified oil producers like the United Arab Emirates, Saudi
Arabia, and more diversified oil producers like Russia, saw considerable boom in
construction at various peaks of oil booms in the last three decades. The crude oil price
boom of the 1970s for instance, sparked off the growth of UAE‟s construction sector.
Despite low crude oil prices in the 80s, key middle east economies, particularly Saudi Arabia
and UAE managed to sustain its infrastructural development.
5.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
0
100,000
200,000
300,000
400,000
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2009
2010
Building & Construction sector GDP Contribution to total GDP
Figure 1: Building & Construction GDP and contribution to total GDP
Source: National Accounts, Vetiva Research
7-yr
CAGR:
35%
As at Q3’10, Construction
accounts for 1.4% of Nigeria’s
Gross Domestic Product (GDP),
from 5.8% in 1981
Construction output has lagged
Crop Production, Crude Oil
Production and Whole & Retail
Trade – the 3 biggest drivers
of Nigeria’s GDP since 1981
Oil Wealth has been a
major driver of
construction boom for oil
producing economies over
the last 3 decades
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Oil fueled economic growth, favourable demograhic fundamentals, growing commercial
activities and tourism, have caused considerable construction boom in these countries.
According to a 2007 report by “Economic Forum”, 15% – 25% of the world‟s
construction cranes were operating in the Gulf region with an estimate of over 2,100
construction projects planned or underway. By 2009, UAE‟s contruction sector has
grown very rapidly with construction accounting for c.11% of its GDP (almost sustaining
the 10% average in the late 1970s). The recent crude oil price boom (2006-2008) also
saw UAE record significant boom in infrastructure and hence its construction sector
benefitted immensely – the completion of the World‟s tallest building in January 2010 –
Burj Khalifa - attests to this.
As a net importer of crude oil, China‟s construction boom cannot be said traced to oil
wealth, but rather, by export driven industrial growth. China‟s construction has been
driven by plans for urban revitilisation and new development. Hence the country
witnessed significant increase in the output of its construction industry, especially in the
last decade. In the first two decades of its reform era (1978 -1999), construction (as
percentage of China‟s GDP) grew to 6.6% from 3.8%. Over the last decade however,
the growth in China‟s construction output has been very tremendous as it accounted for
13% of its 2010 GDP. While noting that the spike in China‟s construction is rather
unsustainable, the emphasis in this case is the sustained commitment, of first the state,
and then private sector on infrastructural development. The question is, when will it be
the turn of Nigeria - OPEC‟s sixth largest crude oil exporter?
7.4%
5.7%6.0%
5.0%
1.4%
0.0%
2.0%
4.0%
6.0%
8.0%
0
4000
8000
12000
16000
20000
UAE Kuwait Qatar Saudi/Arabia Nigeria
Construction GDP Sector Contribution to total GDP
Figure 2: Some OPEC Members Construction Sector GDPs
Source: Country National Accounts, Vetiva Research
Similar to others in the Gulf
Region, UAE has continued
to sustain the construction
boom originally sparked off
in the 70s by discovery and
exploration of crude oil
China’s construction boom was
fueled by export-led industrial
growth
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Light at the end of the tunnel – the next decade story
We see the next decade or two as important to Nigeria‟s infrastructural growth. More
than ever, the emphasis on infrastructure deficit is laudable. While noting that the
challenges (poor policy and budgetary implementation, lack of transparency in
government contract procedures and the attendant abandoning of many projects) which
mitigated the growth of the construction sector are somehow still inherent, we
emphasise the milestones that have been recorded over the years.
One of this is the significant rise in local cement production output (cement imports
have dropped to about 30% of total consumption in 2010 (from 72% in 2005) and the
planned projects still on-going to further increase local production capacity (Dangote
Cement and Lafarge). With a local construction industry that has historically been
plagued by high material prices from importation (cement and steel particularly), the
boost in cement output is an indicator of “better days ahead” in the construction sector.
Secondly, the fast growing emphasis on PPPs, at least over the last five years, is
another case that supports our optimism. For instance, the Lekki Free Trade Zone, Eko
Atlantic City are projects opening up major opportunities for construction activities in
Nigeria. At least, the thought of an artificial Island would have been unimaginable in
Nigeria a decade ago! Notwithstanding, we admit that the bottlenecks are still inherent,
but then, the long term – the next decade or so, holds exciting opportunities for the
construction sector in Nigeria. Hence, we emphasise the robust long term potential of
the construction sector.
Physical Infrastructure Deficit - Key Investment Case
Nigeria‟s physical infrastructure gap, especially in transportation – road, rail, airports
and sea ports - is the strongest investment case for our optimism of growth in the
construction industry.
Only about 30% of Nigeria‟s 193,200 km total road network is paved, relative to an
average of 70% and 58% for frontier and emerging markets respectively. The gap is
wider when compared with advanced economies with an average paved road network of
c.100%. (see figure 3 below).
With the rising emphasis and
growing interest of
stakeholders on bridging
Nigeria’s infrastructure gap,
we believe next decade
holds good prospects for
construction
Our optimism on the
construction is supported by
increasing involvement of the
private sector and the boost
in cement production output
seen over the last few years
The key investment case for the
construction sector remains the
deficit of physical infrastructure
especially in transportation, and
real estate
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The deficiency in rail infrastructure is even worse, as Nigeria‟s existing 3,528km rail
network is grossly insufficent to cater for the rising need for mass transit of people and
goods, given its large population (about 150 million; annual growth rate c.2.5%)
estimated to be growing at an annual rate of c.2.5%. Apart from this, the design of the
rail network (narrow gauge), quite obsolete thus limiting the capacity and type of trains
that can be used on the rails. According to the Federal Ministry of Transport, the rail
transport sector recorded the highest volume of freight (2.4 million tonnes) in 1977
even as passenger numbers reached its highest of 15.5 million in 1984. However, from
the World Bank‟s latest yearly data, volume of freight transported through rail in Nigeria
is about 77 million tonnes per kilometre, while passengers conveyed stood at 174 million
passengers per kilometre. These figures rank quite low in comparison to peer countries
like South Africa and Egypt (see figure 4 below) similar frontier market like Argentina,
Ukraine, Romania and Kazakhstan; and extremely incomparable to bigger emerging
markets like China, India and Brazil.
0%
20%
40%
60%
80%
100%
Figure 3: Relative Comparison of Nigeria’s Paved Roads (as % of total road network) to
Some Frontier Market Countries, *Emerging Markets (EM) and **Developed Markets
(DM) Averages
Source: World Bank Database, Vetiva Research
Compared with frontier markets
average of 52.4 billion tonnes
only 77 million tonnes of goods
(per km) are transported by rail
in Nigeria annually
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Whilst noting the improvement made in airport infrastructure over the last 10 years –
specifically the construction of the Nnamdi Azikwe Abuja Airport and Lagos Muritala
Muhammed Airport Terminal 2, airport infrastructure – in terms of numbers, quality of
infrastructure and even capacity (using airside and landside constraints) cannot rank
pari passu with comparable African Countries – Egypt and South Africa especially.
174 770
500000
1000000
1500000
2000000
2500000
Nigeria Brazil Russia India China South Africa
BRICS average
Passengers Carried (mill. passenger/km) Goods Transported (mill. tons/km)
174
13,865
40,830
12,714 10,804
12,714
77
106,014
4,188
52,409
18,526
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0
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10000
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Nigeria South Africa Egypt FM average EM average ex BRIC
Developed Mkt. Avr. ex
USPassengers Carried (mill. passenger/km) (LHS)
Goods Transported (mill. tons/km) (LHS)
Total Route (Km) (RHS)
Figure 4: Nigeria’s rail transport (total network and passenger/freight transported by
rail) to African peers Vs Frontier, Emerging and Developed Markets Averages
Source: World Bank Database, Vetiva Research
Figure 5: Nigeria’s rail transport (total network and passenger/freight transported
by rail) to African peers vis-à-vis Frontier, Emerging and Developed Markets
Averages
Despite the investment in
airports in the last decade
(MM2, for instance), Nigeria’s
airport capacity as measured
by passenger traffic ranks low
to South Africa and Egypt
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According to the International Civil Aviation Organisation (ICAO), the air-side of an
airport comprise runways, taxiways, gates and parking positions. The number of aircraft
movements (departures/arrivals) per unit of time typically determines the air-side
capacity of an airport, amongst other factors such aircraft mix and weather. The land-
side of an airport comprise terminals and all the facilities used by passengers and cargo
shippers, including security, immigration and custom facilities as well as access to roads
and railways, parking space and storage facilities. Land-side capacity is measured in
terms of number of passenger per year or the maximum number of passengers per day.
For instance, South Africa has fewer international airports than Nigeria (3 as against 4),
however the combined capacity, based on runway length, of the three airports
significantly outweigh Nigeria‟s four international airports (see figure 6 below). Due to
their higher passenger handling capacities, South Africa‟s Johannerburg airport and
Egypt‟s Cairo airport had annual passenger traffic of about 16 million and 14 million
(based on 2009 figures) respectively compared to combined annual passenger traffic of
about 10.2 million for Nigeria‟s four international airports.
Having highlighted the deficiencies in few physical infrastructure – roads, rail, airports
and ports, we note that more attention is being given to proferring solutions to bridge
the gap. From the recent relaunch of the power sector reform, growing popularity of
borrowing (among sub-nationals) as a means to finance infrastructural shortages, the
rising acceptance of Public-Private Partnership, there seem to be a renewed
commitment to addressing key infrastructureal challenges. Against this backdrop, we
believe the construction sector is positioned, on a long term basis, to benefit immensely
from the anticipated rise in infrastructure spend.
29.48
10.25
35.07
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20
30
40
14
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18
South Africa Nigeria Egypt
total length of runway (km) - LHS total passenger traffic (million) - RHS
157
18
58
0
45
90
135
180
0
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800
South Africa Nigeria Egypt
Freight (mill. ton/km)-LHS
Registered Carriers departures ('000)-RHS
Figure 6: Comparison of Nigeria’s Airport Infrastructure Capacity by Passenger Traffic, Length of Runway, Freight and
Registered Carriers Departures
Source: World Bank Database, Vetiva Research
Nigeria has 4 international
airports compared to South
Africa which has 3; However,
annual passenger traffic of
Johannesburg airport alone
outweighs the total for
Nigeria’s 4 international
airports
The growing popularity of sub-
national bond issuance,
amongst other means to
address the problem of
infrastructure deficit signify
long term value generation for
the construction industry
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What will drive construction boom?
Strong Growth and Economic Diversification: Nigeria has been growing at a an
average of 7.4%, over the last 2 years, owing to strong agricultural output despite the
chronic infrastructure problems affecting manufarturing and other real sector. Various
developmental institutions (IMF and World Bank for instance) have forescast growth of
at least 7% over the medium term. In our opinion, Nigeria can achieve a higher growth
rate if key infrastructural bottlenecks, especially power is removed. In addition, we
believe the on-going reforms of the banking sector and interest of the apex bank
(Central Bank of Nigeria) to encourage lending to the Small and Medium Scale Industry
through de-risking of the value chain of key sectors – particularly Agriculture, will boost
Nigeria‟s growth. Commercial Agriculture is a key sector that can push Nigeria‟s growth
into the double digit region. Mining is also receiving attention lately. For instance,
Australian Mines Limited, with due dilligence recently completed, is in the process of
acquiring Nigeria Gold Pty Limited. Following the acqusition, which would give the
company access to Gold mining rights in Northern Nigeria, we should begin to see some
development of the mining industry in the region which, prior to now, has been
underexplored. The development of the mining sector also implicitly portend
opportunities for the contruction industry. An example like this, in the long term, will set
stage for increased economic activities, which will in turn boost demand for commercial
and residential real estate and by default, growth of the construction industry.. As
observed during the rapid growth phase of Asian countries like China, there is a high
correlation between economic growth and boom in construction activities.
Rapid Urbanisation: Nigeria is undoubtedly one of the fastest urbanising countries in
Sub-Saharan Africa. Close to 50% of Nigeria‟s population now live in urban areas,
compared to only 20% in 1980, 16% in 1970 and 13% in 1960. The concentration of
business in few centres have been the key driver of rapid urbanisation in specific cities
like Lagos and Port-Harcourt. According to a recent report from UN-Habitat: State of
African Cities, Lagos State‟s population is expected to reach 12.4 million by 2015,
overtaking Cairo – the current most populated city in Africa. Population explosion in
urban cities have therefore led to the fast growth and urbanisation of previous
neighbouring rural communities. In the case of Lagos State, the influx of population has
caused increasing urbanisation in neighbouring towns of Ogun State. Whilst the threats
of over-urbanisation are imminent (population growing faster than urban economies),
concrete steps are already being taken to provide adequate infrastruture. For instance,
the Lagos State Light Rail, Eko Atlantic City and Lekki Free Trade Zone Projects are
some of the key infrastructural projects of the State Government to address population
explosion and rapid urbanisation.
Demographics and housing demand: With a median age of 19 years and
approximately 55% in working age bracket (15 – 64 years), Nigeria‟s population
distribution portends strong potential for continuing growth in housing demand despite
the high rate of unemployment (estimated at c.19%) which reduces effective demand. It
is obvious however that the long term opportunity present in real estate construction,
can only be realised on the back of strong economic growth and employment
generation.
Nigeria’s growth rate which
crossed 7% last year, is
laudable but focus must be on
the country’s inherent potential
to achieve higher growths rate;
this is key to unlocking the
prospects in the construction
sector
With Nigeria urbanizing at one of
the fastest rates in SSA (c.50%
now live in urban areas vs. 20%
in 1980), the constructions sector
will no doubt benefit from this
rapid urbanisation
With a median age of 19 years
and 55% in the working class
age, there’s an inherent
opportunity for real estate
construction given the housing
need of this age group
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Relatively strong commodity prices in the long term: Notwithstanding the gradual
de-emphasis of oil and the need to shift to alternative fuels, we opine that oil prices
would still remain strong, even in the long term. Biofuels, algae and other alternatives
proposed for crude oil are far from being produced in such commercial quantities that
would meet the world‟s growing energy needs. Moreover, the shift to biofuels for
instance may potentially result in high food inflation. This, in addition to the fact that
more newly industrialised economies (particularly in Asia, Eastern Europe, and Africa)
would emerge, underpins our view, that oil prices will stabilise around c.100/barrel,
though short term fluctuations and volatilities are inevitable. It therefore implies that
Nigeria, as the eighth largest exporter of crude oil globally, is positioned to benefit from
strong oil revenues if its internal challenges can be resolved. This further strengthens
our view of a potential boom in Nigeria‟s construction industry, as a result strong oil
revenues.
Increasing Capacity in Cement Production: A major militating factor to significant
growth in construction activities in Nigeria, has historically been the local shortage of
building materials, especially cement and steel. Nigeria‟s per capita cement consumption
averaged 83kg between 2006 and 2009 and prior to 2009, imports accounted for the
larger proportion of cement consumed in Nigeria. It should be noted that self-sufficiency
in cement production is a major step for construction boom. Countries like China, Saudi
Arabia,etc, that have witnessed significant boom in construction, are net exporters of
cement. However, over the last four years local production of cement has risen
significantly, thus, now accounting for about 70% of consumption. With the additional
plants currently under construction in the sector, Nigeria may likely approach self-
sufficiency in cement production in the medium term (within the next 2 years).
Public-Private Partnerships (PPP): Across the globe, Public-Private Partnerships
(PPP) are becoming increasingly popular in delivering physical and social infrastructure
to people. Despite the need for more aggressive public-participation in the delivery of
basic infrastructure in Nigeria, we note that there has been a rise in the number of PPP-
driven infrastructural projects over the last 20 years. Based on data obtained from
Private Participation in Infrastructure (the World Bank arm on PPPs), up to 51 projects
within the 20 years between 1990 and 2009, were undertaken through PPPs in Nigeria.
Most of the projects occurred within the last five years, with the transport sector being
the major beneficiary, as close to half – 24 projects – were reported for the sector
between 2005 and 2008. In terms of actual value, annual investments rose to $3.1
billion from merely $22.0 million as at 1997 and zero as at 1990, adding up to $23.6
billion from 1990 to 2009. Based on actual value, investments in the Telecoms sector
was the highest, totalling $18.4 billion and accounting for 78% of the total investments
within the period.
If properly managed,
Nigeria’s infrastructure can
benefit immensely from high
crude oil price which we
believe will remain
sustainably strong into the
long term, despite short term
volatilities
The significant boom in
production capacities seen in the
cement sector over the last four
years support a potential boost in
construction activities
The idea of PPP driven
infrastructure projects is
becoming more acceptable in
Nigeria, and this will encourage
increase in construction activities
over the next decade
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Industry Dynamics
Characteristics
High Correlation with budgetary CAPEX: Due to minimal private sector participation,
the construction industry is highly correlated with government‟s budgetary CAPEX. Based on
historical data between 1982 and 2006, a regression of the construction sector GDP on
government‟s total capital expenditure (federal and states) gave a correlation coefficient of
0.92.
Source: World Bank PPI database, Vetiva Research
Telecoms, 78%
Transport, 13%
Energy, 9%
Telecoms, 35%
Transport, 47%
Energy, 18%
Figure 9: Percentage distribution of number of PPI
Projects by number (1990 – 2009)
Figure 10: Percentage distribution of PPI Projects by
Investment Value (1990 – 2009)
0
18
24
9
51
Water and Sewage
Telecoms Transport Energy Total
Figure 7: Number of PPI Projects by sector (1990 - 2009)
0
18.4
3.02.2
23.6
Water and Sewage
Telecoms Transport Energy Total
Figure 8: Investment Value (US$ Billion) of PPI Projects in Nigeria by sector (1990 - 2009)
From 1982 – 2009, the
construction section has
a correlation coefficient
of 0.92 to government
CAPEX
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Huge Operating leverage and low margins : Globally the construction industry is
characterised by heavy fixed asset base, hence high operating leverage, depreciation
expense and low profit margins.
Specialisation: Given the varied types of construction projects, construction firms are
usually specialised and mostly function only in areas of core strengths, which are
determined by their human capacity and equipments. On a broad scale, construction
projects can be divided into three: Building, Heavy/Civil Construction and Industrial
Construction. In Nigeria, very few construction firms operate in all the three classes. In
our view, this is a major reason for Julius Berger‟s dominance in the industry as it has
the capacity (equipments and human) and expertise to operate across these three broad
classes of construction projects.
Earnings seasonality: Construction activities are usually stalled during rainy seasons;
hence the earnings pattern of the construction companies are seasonal. Another form of
seasonality in the construction industry also relates to the timing of release of budgetary
allocation for capital expenditure. Based on weather patterns, construction companies in
Nigeria typically report higher earnings in the first and fourth quarters of the year.
Figure 11: Construction Sector GDP vs. Total Govt. CAPEX (1982 – 2009)
Source: CBN Statistical Bulletin, Vetiva Research
0
500
1000
1500
2000
2500
3000
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Construction Sector GDP Government CAPEX
Construction firms are highly
specialised, and are broadly
divided into three classes:
Building Construction,
Heavy/Civil Construction and
Industrial Construction
Earnings in the construction
industry is affected by seasonal
rain patterns
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Interplay of Professionals: From the first step in the construction process which is
designing, to the final stage of building, construction requires indepth human multi-
tasking and hence involve the interaction of many professionals – engineers, architects,
quantity surveyors, lawyers and even financial advisors.
Players
The Nigerian construction industry is dominated by international construction firms,
although a number of smaller local companies are emerging. Julius Berger Nigeria Plc
remains the market leader, as it controls a large chunk of public sector construction.
With the entrant of Chinese Construction giants however, the dominance of Julius Berger
faces significant threat in the long term. As an example, China Civil Engineering
Construction Company was appointed by the Lagos State Government as the contractor
for the Lagos Light Rail Project. The firm was also awarded the rehabilitation of Lagos-
Jebba rail track by the federal government. The growing popularity of PPPs also means
more international construction firms are likely to come into the Nigerian market.
Other medium-size (based on scale of operation) constructions firms in Nigeria are as
follows Costain W.A Plc, PW Nigeria, Cappa & D‟Alberto, Stabilini Visinoni, Bi-Courtney
Limited, Lekki Concession Company, Reynolds Construction Company Ltd and Setraco
Nigeria Limited, Gerrawa Global Engineering Limited, Piccolo-Brunelli Eng. Ltd, Philco
Nigeria Ltd, Kopek Construction, Niger Construction Ltd, , Enerco Limited, Borini Prono
and Company Limited, Arab Contractors Limited, Triacta Limited, CGC Nigeria Limited,
Standard Construction Limited, Dantata and Sawoe Construction Company Nig, Ltd, and
Mother Cat Limited.
Challenges
Similar to other Sub Saharan Africa (SSA) countries, we identify financing, dearth of
technical expertise and corrupt governments/poor implementation as key challenges
mitigating the development of infratructure and hence the growth of the construction
sector in Nigeria.
Shortage of Technical Expertise: The construction industry generally involves the
interplay of different professionals – engineers, architects and quantity surveyors. Most
construction firms in Nigeria, especially the big names like Julius Berger, China State
Engineering, PW Nigeria rely on expatraiates in these areas as local counterparts are
mostly unskilled and inexperienced. From the perspective of financing and deal
structuring, most local financial institutions do not have the required expertise to
structure infrastructural projects. There are few specialised project finance and trade
finance institutions and the requisite skills to appropriately appraise and structure the
project finance deals and price the associate risks accordingly are not locally sufficient.
There are many construction
firms in Nigeria, but only few
operate on large scale; examples
of these include Julius Berger,
Stabilini Visinoni, Costain and
China Civil Engineering
Most construction firms rely on
expatriates for core functions as
locals are largely unskilled
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 13
Nigeria I Equities I Construction
Business Environment – Regulatory and Policy: Based on various World Bank
metrics on the receptiveness of the business environment to investments, Nigeria still
lags. For instance, Nigeria‟s days of dealing with construction permit is 350, higher than
sub-Saharan average of 268 (see figure 12 next page) . The World Bank 2011 ranking
on “Ease of Doing Business” indicates that Nigeria now ranks 167th (out of 183 countries
examined) in “Dealing with Construction Permits”, and 97th in “Enforcing Contracts”. For
the purpose of examining the competitiveness of Nigeria‟s business environment for
construction companies, we have limited our analysis to three out of World Bank‟s nine
metrics, to capture a country‟s ease of doing business. These three are; “dealing with
cosntruction permits”, “enforcing contracts” and “protecting investors” (see figure 13
also). While admitting the regulatory and policy bottlenecks in Nigeria, we note that
Nigeria ranks quite better than bigger emerging markets like India and China in
“Protecting Investors” and more importantly observed from our analysis, is that Nigeria
still ranks quite better than Brazil, Russia, India and China (BRIC) in at least two of the
three meaures examined.
Notwithstanding, the complexity of Nigeria‟s business environment, especially with
regards to dealing with construction permits, the bottlenecks in Land acqusition, and
general laxity in contract enforcements are still key regulatory impediments to
infrastructural development vis-à-vis the growth of the construction industry. In
addition, the unwillingness on the part of the populace to pay for infrastructure projects
and the resultan t legal tussles that PPP concessionaires may likely face (for instance
the on-going case of Lekki residents against Lekki Concession Company and the Lagos
State government) are considerations that tend to limit participation of the private
sector in infrastruture development.
328
212
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254266
0
100
200
300
400
500
600
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Angola
Benin
Bots
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Cote
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Dealing with construction permit (days)
Figure 12: Comparison of Sub-Saharan African Countries in Business Environment
Attractiveness for Construction Companies
Sources: World Bank Africa Development Indicators Database, Vetiva Research
Notwithstanding various
regulatory bottlenecks,
Nigeria ranks comparatively
well in a number of metrics
employed by the World Bank
to measure business
environment competitiveness
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 14
Nigeria I Equities I Construction
Country
Dealing with
construction
permit
Enforcing
Contracts
Protecting
Investors
Group 1 - better than Nigeria in at least 2 of the 3 parameters ranked
Thailand 12 25 12
Mexico 22 81 44
Estonia 24 59 50
Colombia 32 150 5
Mauritius 39 61 12
South Africa 52 85 10
Lithuania 59 17 93
Indonesia 60 153 44
Czech Republic 76 78 93
Hungary 86 22 120
Pakistan 98 155 28
Malaysia 108 59 4
Croatia 132 47 132
Turkey 137 26 59
Kazasthan 147 36 44
Nigeria 167 97 59
Group 2 - worse than Nigeria in at least 2 out of the 3 parameters ranked
Egypt 154 143 74
Kenya 35 125 93
Brazil 112 98 74
India 177 182 44
China 181 93 93
Russia 182 48 93
Argentina 168 45 109
Ukraine 179 109 43
Jordan 92 129 120
Phillipines 167 97 59
Financing: Given the huge capital requirement for infrastructural development,
financing has consistently been a major bottleneck. It is important to note that there are
conflicting estimates as to the required amount needed to bridge Nigeria‟s infrastructural
deficit. However, according to recent statements in the media by Nigeria‟s minister of
finance – Mr. Olusegun Aganga – Nigeria would need close to $100 billion dollars to
close the gap in infrastructural development. Until recently, Nigeria did not have an
international bond rating against which sub-nationals and corporates seeking foreign
debt can be benchmarked.
Figure 13: Ranking of Emerging and Frontier Markets in business environment
competitiveness relative to Nigeria
Sources: World Bank Database, Vetiva Research
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 15
Nigeria I Equities I Construction
Furthermore, Nigeria, like most SSA economies, has low sovereign debt ratings
(typically below the BB rating) implying that foreign investors have higher risk
perceptions of the economy. Some of these risks which largely stem from the political
and regulatory uncertainties (relating to policy continuation) are further exacerbated by
long payback periods for infratructural projects. Hence, investors are typically worried
about re-couping investments within stipulated timeframes. Therefore, it is difficult to
access foreign capital for long term investments as it is required, for infrastructural
financing. It has also been observed that local financial markets do not have the
capacity to finance infrastructure projects, both from the perspective of actual funding
and technical expertise. This observation is similar across Sub-Saharan African
countries, with South Africa being an exception as its domestic banks, to some extent,
have been able to consistently provide local currency financing for infrastructural
projects.
Misappropriation and poor policy implementation: Central to most of the
challenges already identified, are corruption and poor implementation of projects. Even
in PPPs, the Government needs to play a major role for the PPPs to be successful.
Mechanisms that will enhance and guarantee transparency in the Bid and Tender
process, procurement specifications and final selection of contractors are deemed not to
be in place or enforced. Governments, embarking on open public hearings for major
contracts and appointmentof independent agencies to carry out appraisals on the
projects, would be major steps to correctly address this problem.
Segments
Rail
Current State of Rail Transport: As earlier stated, Nigeria‟s rail network consists
about 3,500 km, narrow gauge (1.067m) single track lines running from Lagos to Kano,
Port-Harcourt to Maiduguri and the uncompleted 349km of standard gauge from Itakpe
to Warri through Ajaokuta. Since rail transportation is generally in a dilapidated stateand
most of the available wagons and locomotives are defective and in poor conditions, this
mode of transportation currently accounts for less than 1% of the land transportation in
the country, thus, putting the roads under significant pressure from heavy haulage. In
the last four years however, the Government appears to have taken major steps in
developing rail transportation by awarding some contracts in rail construction (see figure
14 below). We note however that some of these projects may not have commenced,
hence the proposed completion date may be extended beyond that indicated
Most of the challenges facing
infrastructural development vis-
à-vis construction firms are
hinged on lack of transparency,
misappropriation and poor policy
implementation
Transportation by rail
constitute less than 1% of land
transportation in Nigeria, but
over the last four years it
seems federal government is
taking good steps to develop
rail transport
Accessing long term foreign
capital to support
infrastructure development is
still a major hurdle
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 16
Nigeria I Equities I Construction
Figure 14: Summary of projects/contracts already awarded in rail construction
Rail Projects* Value
( Mn USD) Company Proposed Time of Completion
Abuja Light Rail 102 China Civil Engineering
Construction Corporation 2013
Abuja-Kaduna Railway 850 China Civil Engineering
Construction Corporation n/a
Jebba-Kano rail line rehabilitation 79 Costain Engineering n/a
Lagos Light Rail 1130 China Civil Engineering
Construction Corporation 2013
* Projects may have also been included in summary of federal government planned investment on next page
Outlook: Based on federal government‟s national medium term national development
towards NV:2020, there are considerable opportunities in rail transportation. In line with
this, the national planning commission has itemised the following as key targets to be
achieved in rail transportation;
Total rehabilitation of 3,500 km of the existing narrow gauge rail
Completion of the Ajaokuta – Warri standard gauge line
Increasing the tonnage of freight transported through rail to 1 million metric
tonnes from the current volume of 50,000 tonne
Transportation of 4 million passengers per year
To achieve 500,000 daily trips via mass transit
Introduction of private sector participation
Completion of rail works that have reached 50% of completion as at December
2009
Commencement of the Abuja/Idu to Kaduna standard gauge rail line, coastal rail
line (Niger Delta Rail line) Calabar to Benin and East-West Rail line Aboekuta to
Benin
Linkage of Abuja through rail to the seaports of Lagos, Warri and Port-Harcourt
Figure 15 below summarises the key projects indicated in the targets and the amount
allocated for the projects in the medium term plan.
Sources: Business Monitor, Vetiva Research
In the medium term, close to
10 rail projects have been
itemised by the federal
government for completion
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 17
Nigeria I Equities I Construction
Figure 15: Federal Government planned investment in rail construction Investment Value (N'Billion)
Projects 2011 2012 2013
Rehabilitation of existing narrow gauge from Lagos to Kano 33.85 39.47 39.68
Completion of the 22km standard gauge from Ovu to Warri 0.94 1.09 1.14
Construction of 187.15km standard gauge from Abuja to Kaduna 15.05 17.49 18.31
Construction of 6 stations between Itakpe and Warri 140.82 163.65 171.26
Construction of modern coastal line from Benin to Calabar across 6 Niger Delta States 55.58 64.59 67.59
Construction of Abuja light rail project 19.62 22.81 23.86 Sources: National Planning Commission medium term plan, Vetiva Research
Whilst lauding the targets of the National Development Plan as regards rail transport,
Nigeria‟s poor history of implementation warrants a cautious perspective towards the
achievement of the plan. Based on the average rate of budgetary implementation on the
capital expenditure (CAPEX) side, just about 42% for 2009 and 2010, we do not see
more than 40% - 50% of the stated targets for revamping the rail sector (itemised
above) being achieved under the current administration in the medium term. We believe
therefore, that focus for rail sector development in Nigeria should be on public private
partnerships.
Also, sub-nationals have a more pivotal position to play in rail infrastructure
development. For instance Lagos State, through a PPP scheme with China Civil
Engineering Construction as the contractor, has begun the construction of the Lagos
Light Rail. The Light Rail Project consists of three basic projects – the Iddo/Ijoko line,
Agbado/Marina line and Okokomaiko/Marina line. The Iddo/ljoko line would be 45%
financed by Federal Government, 40% financed by Lagos State Government and 15%
financed by Ogun State Government.
The other two lines (both stations and infrastructure), being funded by the Lagos State
Government, is estimated to cost N170 billion ($1.13 bn) but the operation and
maintenance of the rail line would be run by a concessionaire for a period of 25 to 30
years. According to media sources, China Civil Engineering Construction Company
commenced works on the Okokomaiko/Marina line in late 2010. The rail line is expected
to be completed by 2012.
Based on the National Development Plan, the Federal Government‟s proposed
investments in the Transportation sector over the medium term (2011-2013) is
estimated at N2.2 trillion ($14.7 billion). However, considering the increasing role of
state governments in infrastructural development, it is difficut to forecast the total
expected investments in rail construction given the unavailabilty of the development
plans of most state governments in this regard.
We laud the targets of the
national development plan,
but remain cautious on its
investment outlook given the
history of poor
implementation
At the sub-national level,
Lagos State has been has
been prominent in
infrastructure development,
especially with the Lagos Light
Rail project which sparked off
last year
Based on federal
government’s medium term
development plan,
proposed investment in
Transportation in the next 3
years is about $14.7 billion
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 18
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Roads and Bridges
Current state: Nigeria currently has a total road network of 193,200 kilometres which
comprise 34,123km federal roads; 30,500km state roads and 129,577km local
government roads. Therefore, in percentage distribution, local and state government
roads account for 82% of Nigeria‟s total road network, further supporting our assertion
that sub-national governments (local and state) have a major role to play in road
infrastructure development. In our view, federal and state government roads constitute
the most parts of the 30% paved portion (58,260km) of Nigeria‟s total road network.
(Figure 16 below shows some ongoing projects in road and bridges construction across
Nigeria)
Figure 16: Federal Government ongoing investment in road construction
Projects (Ongoing) Value
(million USD) Company Time for
Completion
River Niger Bridge at Onitsha 5 Setraco Nigeria Limited 2009
Rehabilitation of Akungba-Ikare-Omuo-Kabba Road in Ondo and Ekiti States 10 Philco Nigeria Limited 2011
Rehabilitation of Ifon-Uzebba-Irukpen-Road/road to Ose Bridge, Edo State 13 Piccolo-Brunelli Eng. Ltd 2011
Rehabilitation of Nguru-Gashua-Bayamari Road, Yobe State 15 Gerawa Global Engineering Ltd 2011
Rehabilitation of Oba-Nnewi-Okigwe road 17 Bullettine Construction
Company Ltd 2011
Rehabilitation of the Shagamu-Ajebandele-Ore-Benin road section 2, Ogun State 17
Boriri Prono and Company Nigeria Ltd 2011
Rehabilitation of the Aba-Owerri Road in Abia/Imo states 18 Niger Construction Ltd 2010
Rehabilitation of Abakilik-Afikpo Road (Ebonyi State) 20
Bulletine Construction Company Ltd 2011
Rehabilitation of the Kano-Katsina-Kaura Namoda-Jibia Road section, Zamfara state 20 Mothercat Limited 2011
Rehabilitation of Abakaliki Afikpor Road section 2, Enugu State 23 CCECC Nigeria Limited 2011
Rehabilitation of Efon Alaaye-Erinmo-Iwaraja, Ekiti State 23 Kopek Construction 2012
Rehabilitation of Mararaba Pambeguwa-Saminaka-Jos Road section 2 (Kaduna/Plateau States) 24 PW Nigeria Limited 2011
Sources: Business Monitor, Vetiva Research
Outlook: There is a huge opportunity in road infrastructure development in Nigeria,
given that approximately 70% total road network is unpaved and perhaps unmotorable.
In Nigeria, road development has historically been the Government‟s responsibility.
More recently however, the private sector through PPPs is beginning to participate in
road infrastructure, albeit at a very low rate.
Close to 70% of Nigerian road
are unpaved; over 80% of the
30% paved portion are federal
roads
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 19
Nigeria I Equities I Construction
The Lekki Concession Company (LCC) /Lagos State government PPP for the Lekki-Epe
Expressway (still under construction) is the flagship example of Public- Private
Partnership in road infrastructure in Nigeria. The project, estimated to cost US$300
million is the flagship PPP of the Lagos State Government, and includes the upgrading of
the first 49.4 km kilometres of the Lekki-Epe Expressway and the development of the
first 20 km of the coastal road with an option to construct a southern by-pass. According
to the arrangement, LCC will build and operate the road for 30 years before transferring
to the State Government. Recent protests by native residents in the area has however
stalled the charging of toll fees by the concessionaire.
Not so much has been achieved at the Federal Government level in terms PPPs in road
infrastructure as its flagship PPP with Bi-Courtney Limited – a local construction
company – is yet to commence after close to 3 years. The development of road
infrastructure on a longer term basis would be highly dependent on budgetary
implementation, number of effective PPPs and the Government‟s ability to secure long
term debt for general infrastructural development.
According to the National Devevelopment Plan, it has been estimated that Federal
Government‟s investment in rehabilitation and expansion of Federal Government (Trunk
„A‟) roads would at least be N700 billion ($4.7 billion) over the medium term (2010 –
2013). Some of the projects to be covered under this are summarised below;
Figure 17: Federal Government planned investment in road construction Investment Value
(N'Billion)
Projects (to be funded solely by federal government) 2011 2012 2013
Dualisation of Onitsha – Owerri Road and Onitsha Eastern Bypass 1.64 1.91 1.99
Dualisation of Ibadan-Ilorin road section 1 0.79 0.86 0.99
Dualisation of Abuja-Abaji-Lokoja road n/a n/a n/a
Dualisation of Kano-Maiduguri road n/a n/a n/a
Dualisation of East-West road Warri to Oron via P/Harcourt n/a n/a n/a
Construction of Kano Western Bypass 2.06 2.40 2.51
Construction of Panyam – Bokkos Wamba Road 0.84 0.98 1.03 Sources: National Planning Commission medium term plan
The federal government also has a number of road projects which are proposed to be
implemented through PPPs - see figure 18 below, though the actual investment in these
projects are unavailable.
The future of road construction
gradually tilts more to PPPs;
the Lekki-Epe expressway-
flagship PPP road project in
Nigeria is an example
Not much has been achieved
in federal government led
PPPs in road projects; the
Lagos – Ibadan to Bi-Courtney
is yet to commence
appreciably since more than 3
years
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 20
Nigeria I Equities I Construction
Figure 18: Summary of federal government planned investments in road construction through PPPs
Projects Details
Lagos-Ibadan Expressway Concession Upgrading of existing road by expansion to 8 lanes (Lagos-Shagamu) and 6 lanes (Shagamu-Ibadan)
Concession of 1.35km Guto-Bagama bridge across River Benue Completion of 1.35km with adjoining roads between
Enugu and Abuja
Construction of 2nd Niger Bridge across River Niger at Onitsha/Asaba Completion of 1.75km bridge, 14km road with 3
flyover bridges and 3 other bridges
Road Rehabilitation and expansion
Shagamu-Benin, Benin-Asaba, Abuja Kaduna, Lagos-Badagry, Seme Boarder, Kaduna - Kano dual
carriage ways Sources: National Planning Commission, Vetiva Research
Ports
Nigerian seaports are owned by the Federal Government through the Nigerian Ports
Authority (NPA). There are 13 major ports, 11 oil terminals and 128 jetties with a total
annual cargo handling capacity of about 35 million tonnes. Given the problems of
inefficiency and the resultant port congestion, the government commenced the reform
and restructuring of the ports to introduce private sector participation in 2001. In April
2006, private operators took over as terminal operators of the sea ports, after a
competitive bidding process, with the NPA focusing on its role as the “Landlord”. The
port reforms birth the first major PPP in infrastructural development and currently there
are about 19 terminal operators managing Nigerian seaports in partnership with the
NPA.
Figure 19: Private Port Operators in Nigeria
Company Terminal
APM Terminals Apapa Container Terminal
Apapa Bulk Terminal Apapa, Terminals A&B
ENL Consortium Apapa, Terminals C&D
Greenview Dev. Nig. Ltd Apapa, Terminal E
Josepdam Port Services Ltd TCIP Terminal A
TCI Container Ltd TCIP Terminal B
P&C handling Services TCIP Terminal C
Five Star Logistics TCIP Roro Terminal
APMT Finance Lilypond Cont. Terminal
Port &Terminal Operation Port Harcourt Terminal A
Bua Ports and Terminals Port Harcourt Terminal B
Ecomarine Calabar New Terminal B
Addax logistics Calabar New Terminal C
Asso. Marine Services Warri Old Terminal B
Global Infrastructure Warri New Terminal A
Atlas Cement Onne FOT Jetty
Julius Berger Warri Terminal A
Gulfinger Ltd Koko Terminal
Intels Nig. Ltd Onne, FOT A, FLT B, Calabar New Terminal A, Warri
old Terminal A & New B
Sources: FPPPN, Vetiva Research
The PPP model was adopted
in decongesting the port,
following the port reform
process that commenced in
2001
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 21
Nigeria I Equities I Construction
According to the World Bank data on infrastructure, Nigerian port infrastructure ranks 3
on a scale of 1 to 7 (1 being the worst ranking and 7 the best). Though Nigeria‟s ranking
falls below average, the quality of Nigerian ports can be said to be close to other
emerging market comparables like South Africa, Egypt, India, Brazil, and Argentina (see
figure 20 below). While Nigeria‟s ranking prior to the port reforms (launched in 2000) is
unavailable, we believe the privatisation of port terminal operations (through PPPs) over
the last decade would have contributed to the relative competitiveness in comparison to
similar emerging markets (Brazil, India and Argentina).
Outlook:
Based on the medium term development plan, the federal government plans to rehabilitate
and construct river ports, jetties and wharfs (in Baro, Lokoja, Oguta, Degema and Yenagoa)
by 2013. In addition, the construction of new seaports are also expected in Epe/Lekki Axis,
Brass, Bonny and Badagry as well as development of Calabar port to support free trade
zone. Figure 21 below lists some of the planned/ongoing projects in ports construction.
Figure 21: Planned investment in port development
Project Value (million
USD) Company Comment on timeline
Lokoja Port 15 n/a Construction resumed June
2009
Olokola deep water port 1000 COSCO At planning stage since 2008
Port Complex Lagos n/a Dubai Ports Authority
and Sifax Group Talks ongoing
Lagos Free Trade Zone Port 6000 n/a
Approval obtained for the project
Construction of Degema River Ports 12 n/a
Planned under FG's medium term plan for three years
Isiala Ngwa Inland Container Depot n/a n/a
Construction to have begun in 2009
Sources: Business Monitor, National Planning Commission, Vetiva Research
Brazil, 3
Russia, 4
India, 3
China, 4South Africa, 4
Egypt, 4
Nigeria, 3
Argentina, 3
Bulgaria, 4
Switzerland, 6
UK,5
USA, 6
Singapore, 7
1
2
3
4
5
6
7
Figure 20: Ranking of Nigeria’s Port Infrastructure on a scale of 1 (worst) to 7 (best),
to other emerging and developed markets
Sources: World Bank, Vetiva Research
On a scale of 1 to 7, Nigeria’s
port infrastructure ranks 3,
according to World Bank
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 22
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Real Estate
Current State: The real estate sector in Nigeria is largely divided into Residential and
non-Residential segments. The Residential segment largely account for the larger chunk
of real estate/housing demand in Nigeria.
Residential Segment: According to estimates from the Federal Housing Authority and
other players in the housing sector, housing deficit has been widely reported to be about
16 million units. Since its inception in 1992, the FMBN has approved a total of N121.2
billion mortgage through Primary Mortgage Institutions (PMIs) and Estate Development
Loans (EDLs); however only half of the approved loans (N61.6 billion) has been
disbursed. Hence a total of 53,518 housing units have been built over the 19 year period
from Mortgage backed bonds and Estate Development Loans.
Therefore, it is evident that the Government‟s involvement in housing delivery through
the Federal Mortgage Bank, is grossly inadequate to meet housing demand, which is
growing at such a fast pace, causing widening deficit. With a weak supply side, there‟s
immense opportunity in the residential real estate segment. Beyond the fact that
housing supply lags demand quite significantly, another key constraint in bridging the
huge gaps in housing delivery lies on the demand side, as only a minute portion of
Nigeria‟s 150 million people can afford these houses. FMBN and privately owned
residential estates are only affordable to individuals in the High and Upper Middle
Income bracket (1Upper Middle: $3,945 - $12,200; High Income: > $12,200 based on
World Bank Classification).
In the same vein, mortgages are only accessible to individuals in this income bracket,
which, based on our estimates is less than 5% of the total population. Hence, the
majority (about 95%) of the population which are in the low income bracket still reside
in sub-standard houses mostly single rooms in urban slums or thatched houses in the
rural areas. Figure 22 below shows the distribution of Nigerian Population by the housing
type.
Single Room66.3%
Flat 5.8%
Duplex0.3%
Whole Building 27.2%
Others0.4%
National
Single Room 68.1%
Duplex15.0%
Whole Building0.8%
Flat15.8%
Others0.3%
Urban
Single Room65.7%
Flat 2.5%
Duplex0.2%
Whole Building31.2%
Others 0.4%
Rural
Figure 22: Percentage distribution of households by type of housing units in Nigeria, 2008
Source: NBS Statistical Bulletin, Vetiva Research
The Federal Mortgage Bank,
through Primary Mortgage
Institutions, is at the forefront
of housing delivery, with an
about N121 billion given out
as loans since its inception in
1992
With less than 5% of the
population able to access
mortgage, housing
delivery has consistently
lagged demand despite the
efforts of FMBN
About 70% of Nigerians live
in single rooms in urban
slums or rural areas
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 23
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Commercial Segment: The demand for commercial real estates (offices, shops,
warehouses, hotels) in Nigeria is highly concentrated in commercial cities like Lagos,
(South West) and Port Harcourt (South South). Though this segment accounts for the
less than 20% of real estate demand (our estimate), demand still outpace supply,
especially as available properties are signficantly premium priced. According to Knight
Frank Research, Lagos has the fifth highest office rent (measured US$/sqft/yr) globally
as at Q4‟09. In Nigeria, Julius Berger Plc, HFP Engineering and Costain W.A are the
major construction companies with focus in construction of commercial real estate.
Outlook on Residential Real Estate: There are immense opportunities in the
residential housing sector. A major constraint to the development of this potential has
however being the high interest rates on mortgage and low penetration of mortgage
facilities. Recently however (March 2011), the Federal Mortgage Bank (FMBN)
announced that plans to increase its capital base to N150 billion within the next the 24
months are underway.
Based on BusinessDay Newspaper reports (March 22, 2011), part of FMBN‟s two year
plan would subsequently include the injection of N250 billion annually. In addition to the
planned recapitalisation which would make the FMBN adequately positioned to lend to
estate developers, there was also a change in the fund disbursement policy to lenders.
The change involves reducing the number of tranches in which monies are released to
estate developers to 3 from the previous 4. Estate developers in the new policy
dispensation would have access to higher liquidity and would be in a position to
complete housing projects at a faster rate.
Commercial , 4.6%
Residential, 93.3%
Industrial, 0.5%
Others, 1.6%
2008
Commercial
Residential
Industrial
Others
Percentage distribution by type of real estate in Nigeria
Source: NBS Statistical Bulletin, Vetiva Research
Commercial real estate
accounts for less than 5% of
real estate construction, but
with higher demand, available
properties are significantly
premium priced
With the planned
recapitalisation of the FMBN,
underway over the next 2
years, more estate developers
will be positioned to access
mortgage loans
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 24
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Building Materials – Impact on Construction
Cement, aggregates, steel and iron represent the basic materials needed for most
construction activities. The construction industry more or less represents the service
arm to building materials sector, as the output of the latter forms the input of the
former. Therefore, the growth of the building materials sector has a direct implication on
the outlook of the construction industry. In Nigeria, a key factor constraining the
realisation of the full potential of the construction industry is the dearth of key building
materials, particularly cement, steel and iron. We examine each of these key building
materials below, with focus on current demand and supply, outlook and expected long
term impact on the growth of construction industry.
Cement – Gradual move towards Self-Sufficiency
Although Nigeria is still a net importer of cement, there has been considerable
improvement in local supply - production capacity and utilisation. Local production now
accounts for at least 70% of cement consumption from about 25% some five years ago,
given the rise in local production capacity (to 13.85 million tonnes per annum from 4.25
million tonnes per annum) over the same period. Even with the phenomenal rise in local
production, it is important to note that most of the cement plants (perhaps with the
exception of Dangote Cement‟s Obajana Plant and Lafarge WAPCO‟s Ewekoro plant) are
still operating measurably below full capacity. This implies that there is some potential
for growth from existing capacities. More exciting, is the fact that new plants (Ibese,
Lakatabu, Obajana Line 3), which are expected to become operational later this year,
would add about 13.2 million tonnes per annum to existing capacities of 13.85 million
tonnes per annum.
Given the expected increase in local cement output, industry players have postulated
that Nigeria would become self-sufficent in cement production, and may even become a
net-exporter by 2013. Whilst we allude to this postulation in the medium term, we
believe that self-sufficiency would be very transient if the construction industry grows at
such a rate to realise its full potential. The additional capacities would put Nigeria‟s
cement consumption per capita at c.180kg; but still a far cry in comparison to UAE
(4,198kg), China (1,055kg), and Saudi Arabia (1,294kg), countries which have
witnessed major surge in construction activities over the last two decades.
With the increase in local
production local production
now accounts for c.70% of
total cement consumption, as
against 25% five years ago
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 25
Nigeria I Equities I Construction
Aggregates - Market is Fragmented and Underdeveloped
Despite the fact that aggregates also form a major component of concrete, the market
for the product is largely fragmented in Nigeria. The big cement producers, which
practically are better positioned to forward integrate into aggregates production are
currently not doing so, thereby leaving the aggregates market into the hands of small,
fragmented partipants who either operate on an wholesale or retail. Demand for
aggreagtes would continue to rise as it is a complimentary product to cement. This
presents major opportunities in the form of forward integration for cement companies in
the long term.
Steel & Iron – Local Production Still a Mirage
The construction industry has continued to see notable rise in the use of steel as a
building material. Major characteristics which have continued to endear the material to
contractors and developers include its high strength, ductility, adapatation to pre-
fabrication, speed of erection, among others. Currently, Nigeria‟s steel industry is in a
moribund state, even as Ajaokuta Steel (Nigeria‟s main steel producer) is performing
suboptimally; not surprising then, Nigeria‟s per capital steel consumption, which is less
than 10kg, is awfully low in comparison to similar African countries like South Africa
(c.112kg), Egypt (c.95kg), and even Algeria (about 38kg). Emerging markets like China
(405kg), Russia (178kg), South Korea (936kg), Malaysia (345kg), Thailand (150kg) all
have higher per capita steel consumption. Egypt and South Africa are the major steel
producers in Africa, with South Africa as the largest with production of 7.5 million tonnes
in 2009 versus Egypt‟s production of 5.5 million tonnes, according to the International
Steel Statistics Bureau. Currently, Nigeria does not produce crude steel. At best
imported crude steel are processed into bars by private rolling mills.
0
5
10
15
20
25
0
150
300
450
600
2007 2008 2009 2010E 2011E 2012E
Cement Consumption (million tonnes), RHS
Building & Construction GDP (N'Billion), LHS
Building & Construction GDP (N’Billion) vs Cement Consumption (million tonnes)
Source: CBN, Vetiva Research
The aggregate market is still
largely fragmented with supply in
the hands of small, fragmented
participants; cement producers
can capitalize on market
opportunities here through
forward integration
Nigeria’s steel industry is
practically non-existent as
production of crude steel is
almost nil; hence per capita
steel consumption of 10kg is
abysmally low
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 26
Nigeria I Equities I Construction
Nigeria Vs South Africa & Egypt (Steel production, consumption and consumption per
capita)
Source: World Steel Association, Vetiva Research
0
20
40
60
80
100
120
0
1500
3000
4500
6000
7500
9000
Nigeria South Africa Egypt
Steel Production ('000 tonnes),LHS Steel Consumption* ('000),LHS
Consumption per capita (kg),RHS
Nigeria does
not produce
crude steel
176
93 115
10
9548
405
936
187
345
419
179
0
200
400
600
800
1000
Russia
Bra
zil
South
Afr
ica
Nig
eri
a
Egypt
India
Chin
a
South
Kore
a
USA
Germ
any
Japan
Worl
d
Avera
ge
Comparison of Per Capital Use of Steel (Steel Consumption per Capita, 2009) in Kg
Sources: World Steel Association, Vetiva Research
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 27
Nigeria I Equities I Construction
According to the African Iron and Steel Association, Nigeria‟s demand for steel has been
estimated at 12 million tonnes per annum, which implies that there would still be a
shortfall of about 6 million tonnes, even if Ajaokuta Steel Company (annual capacity of
5.2 million tonnes) and Delta Steel Company (annual capacity of 1 million tonnes)
becomes fully operational. With Delta Steel Company and Ajaokuta almost non-
operational, it is evident how far Nigeria‟s steel industry is towards optimising its
potentials. From the foregoing, the poor state of the local steel industry has been a
major retardant on the potential of the construction industry, as reliance on imported
steel has meant higher costs for construction firms. More importantly most of the
imported steel bars have been adjudged sub-standard.
Even if Ajaokuta and Delta
Steel Company starts
operating optimally, local
production will still be a far
cry to Nigeria’s steel
demand, estimated at 12
million tonnes per annum
Nigerian Construction Sector: A Haven of Opportunities I May 2011 I
Nigeria I Equities I Construction
Figure 18: Emerging market construction companies comparable metrics
Company
(Mkt Mn USD)
EBITDA Margin EBIT Margin ROE (%) EV/EBITDA P/E (x) Dividend yield
Country 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E
ARABTEC UAE 512.88 12.44% 11.55% 8% 7% 13.56 9.95 2.96 3.08 5.46 7.37 0 0
RAUBEX S/Africa 488.39 25% 20% 20% 15% 31.77 20.95 2.82 3.31 5.58 6.53 6 5.19
Long Yuan China 986.31 6% 6% n/a n/a 10.1 10 17.47 13.08 28.83 20.84 n/a n/a
JBerger Nigeria 402.41 14% 14% 6% 4% 41.9 41.1 2.57 2.24 18.81 18.04 4.52 4.73
ACC Limited India 4,025.41 23% 20% 18% 15% 18.17 16.84 8.94 8.72 16.44 16.26 2.19 2.49
LSR Group Russia 3,667.88 25% 26% 21% 23% 6.81 14.71 11.97 8.23 158.22 57.88 n/a n/a
China State Construction China 3,643.32 9% 9% 9% 9% 20.3 19.16 25.41 18.99 25.9 18.85 1.21 1.58
ORASCOM Egypt 8,862.74 22% 25% 17% 20% 18.16 21.73 10.29 8.5 16.25 12.58 4.23 4.61
Reliance Infrastructure India 3,136.59 11% 12% 10% 8% 9.31 7.82 18.46 13.62 9.06 9.1 1.36 1.3
GRF S/Africa 499.55 9% 9% 7% 6% 21% 16% 1.87 2.35 5.54 7.21 4.44 3.66
Sources: Bloomberg, Vetiva Research
Nigerian Construction Sector: A Haven of Opportunities I May 2011 I 30
Nigeria I Equities I Construction
Investment Summary
Stock Market performance
There are six listed construction companies in Nigeria (excluding Cappa &
D‟Alberto), constituting only 1% of the total market capitalisation, with Julius
Berger (JBERGER) accounting for more c.80% of the sector‟s capitalisation. Most
construction stocks are small cap stocks with low liquidity. The sector‟s
performance is largely dependent on JBERGER, given its dominant sector weight.
YTD, the construction sector has only appreciated by 5.85%, lagging the Building
Materials (Cement) sector, and the NSE ASI, which have risen by 10.1% and 3.4%
respectively. The lagging performance of the construction sector has been due to
the YTD loss of 20% on COSTAIN, eroding some gains in the YTD performance of
JBERGER.
Figure 26: Share Price Performance Year Open to 26th May 2011 (Rebased)
Sources: NSE, Vetiva Research
0.7
0.9
1.1
1.3
Dec-10 Jan-11 Feb-11 Mar-11 Apr-11
Vetiva Construction Sector Index JBERGER Costain
JBERGER;
+4%
Construction
Index; +2.5%
COSTAIN;
-20%
The construction sector on the
stock market is only 1% of total
market cap; Julius Berger
accounts for c.80% of sector’s
capitalisation
YTD gain of the construction
sector (measured by Vetiva
Construction Index) stands at
2.5%
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 31
Nigeria I Equities I Construction
Julius Berger Plc
Consistent Track Record
Still the market leader...Julius Berger remains the market leader in
the construction sector, controlling more than 60% of Federal
Government‟s contracts. Given its huge equipment base and expertise
in different aspects of construction – heavy/civil, real estate and
industrial - the company has sustained its leadership position in the
construction space.
...But competitive threat is on the rise: We see Julius Berger‟s
market position becoming gradually pressured with the entrant of the
Chinese Construction firms. In our view, the rising preference for
Chinese Construction companies may be due to the fact that they can
deliver projects at cheaper rates, thus, attracting higher technical and
partnership agreements with Nigeria. Moreover, most of the firms are
state owned; meaning Nigeria stands to benefit in other sectors from
the bilateral relationship. Notably, China Construction Engineering
Company was awarded the gigantic Lagos Light Rail Project which is
estimated to cost $1.4 billion by the Lagos State Government. We note
also that the Lagos – Kano rail project, which was initially awarded to
China Construction Engineering Company at a cost of $8.3 billion in
2006 but not executed due to the funding challenges, has recently been
re-scoped in six stand-alone segments in which the Abuja – Kaduna line
would be the start off.
Valuation and Recommendation: We maintain an “ACCUMULATE”
rating on Julius Berger, given that the stock (at a current share price at
N55.71) has an expected upside of 15% to N64.15- the midpoint of
our revised target price range (N60.45 – N68.35). Our target
valuation is based on the DCF methodology, with Julius Berger‟s fair
value rolled one year forward at its weighted average cost of capital.
Stock Data
Bloomberg Ticker:
JBERGER:NL
Market Price (N)
55.71
Shares Outs (bn)
1,200
Market cap (N‟bn)
62.50
Target Price range (N)
60.45 – 68.35
Rating ACCUMULATE
Price Performance JBERGER NSE
12-month (%) 5.9 -1.1
6-month (%) 11.4 3.8
YTD (%) 11.4 3.4
Financials 2009A 2010E 2011F
Turnover (N'bn) 150.3 160.2 184.3
EBITDA (N'bn) 23.2 23.0 27.9
PAT (N'bn) 3.3 4.3 6.8
EBITDA Marg (%) 41.1 57.8 59.6
PBT Margin (%) 33.6 50.9 55.1
PAT Margin (%) 32.4 49.3 54.0
Valuation 2009A 2010F 2011F
P/E (x) 19.3 14.3 9.4
P/BV (x) 8.1 7.5 6.7
EV/EBITDA (x) 2.9 2.9 2.4
Div. Yield (%) 4.5 5.7 9.1
ACCUMULATE
Figure 31: YTD Share price performance vs. ASI and sector index (Rebased); Shareholding Structure
Sources: NSE, Vetiva Research
0.9
1.0
1.0
1.1
1.1
1.2
Dec-10 Jan-11 Feb-11 Mar-11 Apr-11
Vetiva Construction Sector Index JBERGER NSE ASI
Bifilger
Berger,
49.9%
Lagos State
Government
, 10.3%
Plateau
State
Government, 4.6%
Benue State
Government
, 5.3%
Nigerian
Citizens,
29.9%
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 32
Nigeria I Equities I Construction
Investment Thesis
Expertise & Experience: Julius Berger has more than 40 years of vast
construction experience in roads and bridges, railways, airports, dams and
buildings. Notable projects which Julius Berger has handled in the past include the
Eko and Third mainland Bridges in Lagos, the Tuga (River Niger) Bridge, Nnamdi
Azikwe Airport Abuja among others. (See figure 28 on page 36 projects carried by
Julius Berger in Nigeria). The company‟s expertise centres round its capability to
plan, design, and construct. Julius Berger operates its own quarries, mixing plants,
repair and recondition workshops as well as a large land and transport fleet. (See
list of equipments in figure 27 below) This massive investment in equipments
coupled with the expertise of its staff, makes the company capable of starting and
delivering on projects promptly, hence giving Julius Berger preferential
considerations for government contracts.
Strong Revenue Potential: Julius Berger remains the strongest listed
construction firm; its history of proven job quality in the Nigerian construction
space is largely unrivaled. In view of the rising emphasis on physical
infrastructural development in Nigeria, we believe it is necessary for investors to
have some exposure to such infrastructure-linked equities like Julius Berger in a
bid to benefit directly from the expected boom in the longer term. The renewed
interest in the power sector also offers Julius Berger some growth opportunities;
we believe the company would participate actively in the construction works in the
power sector due to its dominant market share in Federal Government‟s
construction contracts.
Strategic positioning of operational bases: Julius Berger has operational
bases in three key zones in Nigeria – North Central (Abuja), South West (Lagos)
and South-East/South-South (Niger Delta Region), which gives the company the a
strategic advantage of wide coverage. More importantly, these regions are areas
of fast growing construction activities. Lagos, being the commercial nerve-centre
of Nigeria is witnessing significant growth in construction activities, especially in
the area of transportation. Abuja, also as the Federal Capital Territory has seen a
major rise construction activities in the past decade, especially as population influx
into the city has necessitated expansion into new towns. Julius Berger‟s Niger-
Delta base enables the company to be a major partaker in the construction
activities in the region‟s oil industry.
Economies of Scale: In the construction industry, economies of scale refer to the
less-than-proportionate rise in construction costs as project size increases. As the
biggest construction company in Nigeria, a key strength of Julius Berger in this
regard, is the fact the company, as a result of its massive equipment base, is
more favourably disposed to win contract bids on large-scale construction projects,
given the inherent cost minimisation edge over smaller construction companies.
Good Brand Name: Julius Berger has a good brand, which has been known for
good work, quality and consistent track record, in the Nigerian construction
industry. The company‟s brand is almost indistinguishable from the entire
construction industry.
Julius Berger has a rich 40 years
experience in Nigeria’s construction
industry and wide range of
equipments for various construction
activities
Julius Berger is poised to benefit
from rise in construction activities in
view of the anticipated infrastructure
development
Julius Berger’s operational bases are
positioned in Lagos, (South-West),
Abuja (North-Central), and the Niger
Delta, giving the company a strategic
advantage
In a industry that mainly comprise
small/medium scale players,
Economies of scale is a major
comparative advantage for Julius
Berger
Julius Berger enjoys technical
support from the parent Bilfinger
Berger SE through Bilfinger
Berger Nigeria
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 33
Nigeria I Equities I Construction
Strong Support from the parent: Another notable competitive advantage of
Julius Berger is the strong support, in form of technical expertise, financing and
innovation, of its parent company – Bilfinger Berger Nigeria, which is a
multiservice international construction group, formed in 2006 as a wholly owned
subsidiary of Bilfinger Berger SE. Bilfinger Berger Nigeria oversees and co-
ordinates the group‟s (Bilfinger Berger SE) business in Nigeria. Through the
company, Julius Berger taps into the vast potential, experience and technical
know-how of the group Bilfinger Berger SE – a German – based international
multiservice construction company formed in 1975 from a merger of three
construction companies.
Business Overview
Profile
Julius Berger Nigeria Plc was established in 1965, originally set up as a subsidiary
of a German-based construction company who has been contracted to work on a
bridge-building project. It subsequently diversified into road and industrial
construction. Since inception, Julius Berger‟s major client has remained federal
and state governments. The first contract the company executed in Nigeria was
the erection of the 2nd mainland bridge (popularly called the Eko Bridge). Julius
Berger changed to a publicly limited liability company in 1979. The company
played a major role in the construction of the industrial and civil infrastructure of
the 70s and the 80s. Following the promulgation to make Abuja the Federal
Capital Territory in 1976, the company became closely involved in the building the
infrastructure of the new federal capital territory. Julius Berger became a publicly
quoted company (listed on the Nigerian Stock Exchange) in 1991 and
commissioned its head office complex in Abuja in 2001. The company operates
through its three operational bases in the Lagos (South-West), Abuja (North
Central) and Niger Delta (South-South).
Construction Activities
Julius Berger can perform a wide-range of construction as summarised below;
Buildings - Office Buildings, Functional Buildings, Residential Facilities,
Sports/Recreation Facilities; Specific examples include the National Assembly
Complex, Federal Ministries Complex, Central Bank of Nigeria Headquarters Abuja.
Infrastructure – Roads and Bridges, Railways, Airports, Dams and Water Supply;
Specific Examples include Port-Harcourt/Onne Rail line, Itakpe/Ajaokuta, Challawa
Gorge Dam etc
Industrial Construction – Plants and Factories (Cement Plant Obajana,
Fertilizer Plant Onne), Oil and Gas (Bonny LPG Tank, Floating Filling Stations),
Power Stations (Power Plant Ikot Abasi Aluminium Smelter) etc
Marine – Ports, (Apapa Wharf Extension and Rehabilitation), Jetties and Piers,
Dredging
Julius Berger operates as a full vertically integrated company through its support
services units detailed as follows;
Julius Berger was established on
1965 and since then, the
company’s major client has been
the Nigerian government
Julius Berger’s construction
activities are broadly divided into
building construction, industrial
construction, infrastructure and
marine construction
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 34
Nigeria I Equities I Construction
Support Service Units
Plants and Quarries: Julius Berger runs its own quarries and mixing plants. The
company operates 10 quarries with an aggregate production capacity of 2.5 million
tonnes per annum, 11 concrete mixing plants with a hourly capacity of 550m3 and
7 asphalt mixing plants with combined capacity of 630 tonnes per hour.
Equipments: The Company owns and operates a large number fleet of
construction equipments.
Figure 27: Julius Berger Construction Equipments
Equipment Description Specific Type Number
Earthmoving Equipments Excavators 130
Dozers 90
Wheel/Track Loaders 60
Graders 60
Scapers 10
Compactors 130
Lifting Equipments Tower Cranes 65
Mobile Cranes 100
Gantry and Overhead Cranes 70
Material and Personnel Hoist 20
Fork Lifts 110
Truck Mounted Concrete Pumps 15
Transportation & Marine Equipments Trucks 660
Trucks with Trailers 465
Tugboats 20
Pontoons 35
Diesel Locomotives 7
Bucket and Platform Wagons 60
Speed and Working boats 80
Jack Up Barges 3
Pontoons for Pile driving of pile
boring operation 2
Laboratories: Julius Berger operates central laboratories in Abuja and Lagos for
the testing of all its construction materials.
Special Facilities: These are used in fabrication of steel products,
manufacturing of aluminium products, production of oxygen gas, remoulding of
truck tyres and reconditioning of truck and marine engines.
Sources: Company, Vetiva Research
Julius Berger runs its own
quarries and concrete mixing
plants
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 35
Nigeria I Equities I Construction
The company also has established factories for pre-cast concretes units, railway
sleepers, roof tiles, interlocking pavement, blocks, kerbstones, and sewage
pipes. These products were designed to ensure quality and flexibility whilst
enhancing the timely completion of projects.
Special Units
Foundation Technology: This ensures the delivery of customised cost effective
solutions for the foundation structures of Julius Berger projects. The services
provided by this unit are as follows; Explanatory drilling, Soil reports, Foundation
design and engineering, Subsoil consolidation, Wick drains, Bored Piles (5 drilling
rigs), Driven Pills (5 pilling rigs) and Water Wells
Technical Services: Services provided include design and engineering for
building and civil engineering projects, budget estimates for feasibility studies,
scheduling, feasibility studies and project management.
Subsidiaries
Julius Berger Services Nigeria Limited: The company is a wholly (100%)
owned subsidiary with principal activities in port management services.
Abumet Nigeria Limited: It is a 70% owned subsidiary of Julius Berger Plc with
major activities in manufacturing and installation of building aluminum
components.
*International Contracting Service Limited; **Construction Engineering + Contracting
Julius Berger Nigeria
Support
Service Units
Special UnitsSubsidiaries
Plants and Quarries,
Equipments, Laboratories, Special Facilities
Abumet Nig.
Ltd (70% owned)
Julius Berger Nigeria plc Corporate Structure
Source: Vetiva Research, Company Website
Foundation
Technology,Technical Services
Bilfinger Berger Nigeria
Bilfinger Berger SE
CEC**ICS*
Julius Berger
Services Nig. Ltd (100% owned)
The company operates special
facilities used in fabrication of
steel and manufacturing of
aluminum products
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 36
Nigeria I Equities I Construction
Figure 28: Construction Projects Handled by Julius Berger
Projects Construction Period
Buildings/Sports/Recreational Centres Construction
Central Bank of Nigeria HQ, Abuja 1999 - 2002
Federal Ministries Complex, Abuja 1990 - 1995
Police Force HQ, Abuja 1998 - 2001
National Assembly Complex 2004 - 2007
National Stadium, Main Bowl, Abuja 2000 - 2003
IBB International Gold Course, Abuja 1987 - 1991/1994
National Chilren's Park and Zoo, Abuja 2001
Velodrome Sports Complex, Abuja 2002 - 2003
International Conference Centre, Abuja 1990 - 1991
National Hospital, Abuja 1997 - 1998
Shehu Musa Yaradua Centre 2000 - 2002
Ogeyi Place Hotel, Port-Harcourt 2000 - 2003
Tinapa Business Resort 2005 - 2007
Railway Village Agbor 1997 - 1999
Army Barracks Abuja 1989 - 1992
Residential Area, LNG, Bonny Island 1996 - 1999
Infrastructure - Roads, Bridges, Railways, Airports, Ports, Jetties
Eko Bridge, Lagos 1973 - 1975
Inner Ring Bridge, Lagos 1975 - 1979
Imo River Bridge 1991 - 1993
Tuga Bridge, River Niger 1988 - 1989
Tombia Bridge, Nun River 2001 - 2002
Infrastructure works for Abuja 1980 - 1998
Ekole Bridge, Yenagoa 2006 - 2007
Itakpe-Ajaokuta Rail line 1987 - 1990
Nnamdi Azikwe Int. Airport Abuja 1993 - 1997
Osubi Airport, Warri 1997 - 2000
Katsina Airport & Infrastructure 2006 - 2007
Yola Airport 2000 - 2001
Tincan Island Port, Lagos 1976 - 1977
Warri Port 1977 - 1979
Sapele Port 1980 - 1982
Apapa Wharf Extension 1975 - 1978
Apapa Wharf Rehabilitation 2000 - Ongoing
Bonny LNG Jetty 1996 - 1999
Bonny LPG Jetty 2000 - 2002
Ikot Abasi Jetty 2001 - 2003
Industries; Factories, Power Plants, Oil & Gas Construction
Aladja Steel Plant Warri 1978 - 1982
Ajaokuta Steel Plant lot 2 1980 - 1990
Alumium Smelter, Ikot Abasi 1990 - 1999
Fertilizer Plant, Onne 1983 - 1987
Cement Plant, Obajana 2003 - 2005
Bonny LNG Plant 1996 - 2000
Bonny LNG Storage Tank 2000 - 2003
Atlas Cove Single Point Mooring 2000 - 2001
Floating Filling Stations Niger Delta 2007 - Current
NNPC Retail Outlets Phase I-V 2002 - 2007
Power Plant, Ikot Abasi Alumium Smelter 1993 - 1995
Power Plant, Warri Port 1977 - 1979
Power Plant, Tincan Island 1976 - 1977
Sources: Company, Vetiva Research
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 37
Nigeria I Equities I Construction
Revenue Structure Construction activities account for c.98% whilst sales of goods and services from
its subsidiaries account for only 2% of the company‟s total revenues. We estimate
that federal government contracts account for 55% – 60%, state governments
25% – 30% and private sector (mainly Oil and Gas industry) 10% - 20%. This
estimate shows that Julius Berger‟s revenue is highly concentrated with
government contracts, which in turn is dependent on budgetary allocation to
capital expenditure and more importantly, implementation of the capital
expenditure budget. We believe there would be increased competition in the Oil
and Gas sector if the Petroleum Industry Bill is implemented, given the bill‟s focus
on local content development. Hence, we are likely to see increased participation
of fully indigenous construction company in the construction contracts of the oil
and gas industry. Nonetheless, Julius Berger‟s capacity (in terms of asset base) to
undertake and execute complex construction contracts in the oil and gas industry
would continue to give the company a good edge.
Outlook on Revenue
Given the capital intensive nature of infrastructure projects, governments have
been the biggest spender on infrastructure in Nigeria. Hence, Julius Berger‟s
revenue fortunes in the medium term (3 to 5 years) remains largely hinged on
governments‟ (state and federal) budgetary allocation to capital expenditures.
Notably, however, the landscape of infrastructure financing on the African
continent is gradually changing with rising focus on private sector participation,
especially in form of PPPs. In this regard, construction companies are going
beyond construction to patterns like “Build and Operate” (BO) or “Build, Operate
and Transfer” (BOT) arrangements in which the companies are the co-financiers of
the projects, with the government or other financiers. Drawing a cue from the
construction of Lekki-Epe expressway and Muritala Mohammed Airport (MMA) 2,
which are PPP projects and the on-going Lagos Light Rail Projects being
constructed by the Chinese State Engineering Corporation using a similar PPP
pattern, we believe the structure of the construction industry, in the longer term
(5 – 10 years), will no doubt change towards this pattern. It is therefore important
for Julius Berger to begin to re-position its business model for long term relevance
in the Nigerian construction industry.
Notwithstanding, Julius Berger‟s revenue prospects remain very strong at least in
the next five years. The key reason, which cannot be overstressed, is the
investments anticipated in physical infrastructure from the government. However,
a likely drag on Julius Berger‟s strong prospects in the medium term, in our view is
poor budgetary implementation, especially on the CAPEX side. Notably, budgetary
implementation on the CAPEX side stood around 27%, in contrast to over 100%
implementation on the recurrent side. On a quantitative note therefore, we
estimate a 7% and 15% growth in revenues in 2010 (yet to be announced) and
2011 respectively. With the expectation that federal government would have fully
settled in from 2011 transition and therefore pursue infrastructure development a
bit more aggressively, we project a higher growth rate of 20% (YoY) in revenue
over the medium term (2012 – 2015).
Revenue is concentrated around
federal government’s budgetary
allocation to CAPEX
Medium term revenue outlook is
hinged on CAPEX budgetary
implementation; however a
repositioning of Julius Berger’s
business model in the longer term,
to capture PPP opportunities is
imperative
With CAPEX budgetary still very low
at around 27% (based on 2010
budget), stronger revenues is
anticipated for Julius Berger as
implementation increases
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 38
Nigeria I Equities I Construction
Cost Structure
The cost of the construction industry is quite complex, given the diverse forms of
construction projects, but generally, the costs component of a construction firm is
divided into variable and fixed costs.
The variable component is subdivided into two categories: Wages and Materials.
Construction materials include cement, aggregates, steel, iron rods, wood etc.
Though wages generally increase with the size of construction (as more labour
would be required), we believe, the reverse is true for Julius Berger – hence
construction materials account for a larger portion of its variable costs rather than
labour. In Nigeria, construction labourers are somewhat poorly paid and most of
these workers are purely on a wage basis with no benefits from the company.
Also, the construction materials, especially cement and steel are quite expensive
in Nigeria – about one the highest globally – since Nigeria is still a net importer of
these materials.
While noting the high operating leverage of the construction industry (due to high
fixed costs) variable costs as a proportion of total costs, still tends to be higher
than in the manufacturing industry.
The fixed component of the construction costs is essentially in the form of
depreciation and maintenance charges, given the high fixed asset base of the
industry. For Julius Berger, which is more or else a fully integrated construction
firm with Plants, Quarries, Pre-cast concrete factories, Heavy machineries and
equipments, overall depreciation and maintenance charges for these units would
be quite significant. The advantage of its fully integrated service structure however
is the fact that overall production costs of pre-cast construction materials would
tend to be lower than if the materials were purchased ready-made.
Economies of Scale: Unlike the manufacturing sector where economies of scale
is quite noticeable and the benefits therewith easily accruable, the workings of the
construction industry is somewhat different and it is difficult to achieve economies
of scale. The key to economies of scale in the construction industry is integration.
Julius Berger is perhaps the only construction firm in Nigeria that can be said to
have achieved some level of economies of scale, given its special services unit
(which comprises its pre-cast factories, plants, quarries and equipments).
Outlook on Costs
As against the historical rising trend of Julius Berger‟s costs (especially costs of
sales), we expect some moderation in material costs growth, and hence total
costs. Our expectation is predicated mainly on the expected reduction in cement
prices in the long term, with the increasing production output in the sector. This,
coupled, with the company‟s economies of scale (relative to smaller sector
players), should see Julius Berger‟s costs grow at a slower pace. We estimate a 3
year CAGR of 18% over FY‟10 to FY‟13 as against the historical 3 year CAGR (from
2006 to 2009) of 42.9%.
Cost structure is complex but
broadly driven by cost of
construction materials, depreciation
and other fixed costs and wages
Economies of scale is difficult to
achieve in the construction industry,
but Julius Berger can be said to
have achieved economies of scale
given its integration
In line with the expected increase in
cement sector output in the next
few years, we expect some
moderation in growth of
construction material costs
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 39
Nigeria I Equities I Construction
Financial Analysis
In line with our overall medium term expectations for Julius Berger revenues, we
project a 3-year CAGR growth of 65% from FY‟10E of N160 billion to FY‟13F of
N265 billion. Expected growth in profitability however, is not as impressive as top-
line since we do not anticipate any major improvement in Julius Berger‟s
characteristically low profit margins, given the huge operating leverage of the
business. Hence we project a 3-year CAGR of 18.3% in EBITDA and 7.4% in EBIT.
Given the nature of Julius Berger‟s business, we believe the company would
continue to invest in its physical assets and hence, would continuously require
periodic financing. The company still has up to a C50 million 3 year credit line with
HSBC Bank London, with about 69% drawn as at FY‟09. Given that the loan is
priced at a floating rate of Euribor plus 1.2%, it is difficult to project interest
payments, however we expect minimal interest payments (low interest rate
compared to local borrowing rates), though subject to exchange rate volatility.
With the loan expected to be fully repaid by 2012, we have assumed that the
company will not take up any long term debt for the rest of our forecast period.
We project a 3 year CAGR growth of 14.7% and 29.9% in pre-tax and after tax
income to N14.1 billion and N9.5 billion in FY‟13 from FY‟10 estimates of N9.1
billion and N4.3 billion; hence we expect Julius Berger‟s Earnings per Share to
come close to N7.95 by FY‟13 from N2.82 FY‟10 estimate (3-year CAGR of 29.6%)
39.0%
44.2%
31.9%
6.6%
15.0%
20.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
0
50
100
150
200
250
2007 2008 2009 2010E 2011F 2012F
Revenue (N'Billion) YoY Growth (%)
Figure 29: JBerger’s Revenue (N’Billion) and YoY Revenue
Growth (%)
Figure 30: EBITDA (N’Billion) and EBITDA Margin (%)
Sources: Annual Accounts, Vetiva Research Estimates
11% 11%
15%
14%
15%
15%
10%
12%
14%
16%
0
9
18
26
35
2007 2008 2009 2010E 2011F 2012F
EBITDA (N'Billion) EBITDA Margin (%)
Julius Berger’s C50 million loan was
69% drawn down as at FY’09; the
loan has a 3 year tenor, expiring in
2012
We project a 3-year CAGR growth of
65% in revenue to N265 billion in
FY’13 from FY’10E of N160 billion
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 40
Nigeria I Equities I Construction
In line with our assumption that Julius Berger is unlikely to take up new long
term debts in the short to medium term after its current C50 million line matures
in 2012, we expect the company‟s debt ratios (total debt to equity & total debt to
assets) to moderate downwards.
Figure 33: Debt, Debt to equity and CAPEX to total assets ratios
Sources: Annual Accounts, Vetiva Research Estimates
4.0%
5.1%
6.8% 6.9%
6.2%
5.5%
3.5%
4.5%
5.5%
6.5%
7.5%
0
4
7
11
14
2007 2008 2009 2010E 2011F 2012F
EBIT (N'Billion) EBIT Margin (%)
184%
66% 80%
-3%9%
23%
-50%
0%
50%
100%
150%
200%
2.5
4.5
6.5
8.5
10.5
12.5
2007 2008 2009 2010E 2011F 2012F
PBT (N' Billion) PBT growth (%)
Figure 31: Operating Profit -EBIT (N’Billion) and EBIT
Margin (%)
Figure 32: Pre-tax profit (N’Billion) and EBITDA
Margin (%)
Sources: Annual Accounts, Vetiva Research Estimates
0.0%
40.0%
80.0%
120.0%
160.0%
2007 2008 2009 2010E 2011F 2012F
Total Debt to Equity Total Debt to Assets CAPEX to Sales
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 41
Nigeria I Equities I Construction
Valuation
Our valuation is based on the Discounted Cash-flow Methodology (DCF) with
forecasts spanning five years.
DCF assumptions -
Revenue growth: 15% in 2011; 20% from 2012 to 2015. As the industry
approaches its peak growth rate, we expect some declines in growth rate, until
it finally stabilizes in the longer term.
Our long term perpetual growth rate stands at 4% based on our thinking that
growth in the construction industry would eventually lag long term GDP growth
rate (estimated at 6%), expected as a country moves towards being a
developed economy.
Cost of sales (as percent of sales): Assumption of 82% over forecast period,
slightly lower than historical three year average of 83.5%, as we see only a
little upside to costs in the long term, given our expectation of relatively stable
cement prices, a single digit growth in long term inflation and expectations of
an improved power sector.
CAPEX: Based on three years historical CAPEX/sales ratio of 15.5%
WACC assumptions are stated in the table below;
Figure 34: WACC Assumptions
After tax cost of debt* 2.2%
Tax rate 32.0%
Risk free rate 12.5%
Beta 0.71
Equity risk premium 5.0%
Debt/Total Capital 23%
Shareholders Equity/Total Capital 77%
WACC 14.2%
DCF value N59.55 FY’11 Target Price (rolled six month forward at WACC) N64.15
4 six month exponential weighted average of 20 year bond yields adjusted quarterly
Rating
Our revised DCF-based valuation for Julius Berger gives a target price of
N64.15 which implies a potential return of 15% relative to the company‟s
current price of N55.71 Hence we maintain an “Accumulate” rating on Julius
Berger‟s shares.
Our forecast span through five
years, assuming 15% growth rate in
2011 and 20% from 2012 to 2015
Costs (as percent of sales) is kept at
82% in the forecast period
Our revised target price for Julius
Berger is N64.15 – a potential 15%
return to its current price; hence we
maintain an “Accumulate”
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 42
Nigeria I Equities I Construction
Appendix 1: Financial Statements: Actual and Forecasts (N’Mill)
INCOME STATEMENT (N'Mill) 2,007 2,008 2,009 2010 E 2011 F 2012 F
Turnover 79,074 114,029 150,358 160,282 184,324 221,189
Cost of Sales (66,243) (96,786) (123,102) (131,431) (149,671) (180,822)
Gross Profit 12,831 17,243 27,256 28,851 34,653 40,367
Operating Expenses (4,435) (5,610) (6,437) (5,802) (6,673) (8,007)
Core Operating Profit 8,396 11,632 20,819 23,048 27,980 32,360
EBITDA 8,748 12,736 23,169 23,048 27,980 32,360
Depreciation & Amortization (5,595) (6,922) (12,977) (11,932) (16,601) (20,151)
EBIT/Operating Profit 3,152 5,814 10,192 11,117 11,379 12,209
Interest Payable & Charges - (573) (747) (1,983) (1,428) -
Profit Before Taxation 3,152 5,241 9,444 9,134 9,951 12,209
Taxation (1,384) (2,733) (6,144) (4,859) (3,184) (3,907)
Profit After Taxation 1,768 2,508 3,300 4,275 6,767 8,302
BALANCE SHEET (N'Mill) 2,007 2,008 2,009 2010 F 2011 F 2012 F
Fixed Assets 24,000 28,574 48,689 57,949 67,579 78,881
Long Term Investments 5,684 - 2,000 2,000 2,000 2,000
Inventories 9,901 12,146 15,222 17,463 19,887 24,026
Debtors 30,873 45,171 47,083 58,754 67,567 81,081
Bank and cash balances 3,947 22,844 9,047 12,633 13,229 5,553 Other Receivables and Current Assets 14,149 29,694 32,659 32,183 37,011 44,413
Total Current Assets 58,870 109,854 104,012 121,033 137,695 155,072
TOTAL ASSETS 180,982 207,274 235,954 278,012 350,103 395,816
Creditors & Accruals 1,929 5,334 4,046 3,896 4,480 5,376
Other Creditors 74,640 114,530 119,880 146,691 168,695 202,434
Short Term Loan 118 4,290 8,094 6,307 7,041 7,501
Taxation 1,389 2,184 3,954 4,859 3,184 3,907
Total Current Liabilities 78,076 126,338 135,974 161,753 183,400 219,217
Long-Term Loans - - 3,569 5,593 2,937 -
Provision for Gratuity 3,975 4,582 6,304 4,250 9,825 2,379
Total Non-Current Liabilities 3,975 4,582 9,874 9,843 12,762 2,379
TOTAL LIABILITIES 176,865 201,638 229,310 270,183 341,644 386,362
Net Assets 4,117 5,635 6,644 7,829 8,458 9,454
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 43
Nigeria I Equities I Construction
Appendix 2: Financial Statements: Actual and Forecasts (USD Mill)
INCOME STATEMENT (USD'Mill) 2,007 2,008 2,009 2010 F 2011 F 2012 F
Turnover 672 916 1,021 1,034 1,189 1,427
Cost of Sales (563) (777) (836) (848) (966) (1,167)
Gross Profit 109 138 185 186 224 260
Distr. & Admni Expenses (38) (45) (44) (37) (43) (52)
Core Operating Profit 71 93 141 149 181 209
EBITDA 74 102 157 149 181 209
Depreciation & Amortization (48) (56) (88) (77) (107) (130)
EBIT/Operating Profit 27 47 69 72 73 79
Interest Payable & Charges 0 (5) (5) (13) (9) 0
Profit Before Taxation 27 42 64 59 64 79
Taxation (12) (22) (42) (31) (21) (25)
Profit After Taxation 15 20 22 28 44 54
BALANCE SHEET (USD'Mill) 2,007 2,008 2,009 2010 F 2011 F 2012 F
Non-Current Assets
Fixed Assets 204 229 331 374 436 509
Long Term Investments 48 0 14 13 13 13
Inventories 84 98 103 113 128 155
Debtors 263 363 320 379 436 523
Bank and cash balances 34 183 61 82 85 36
Other Receivables and Current Assets 120 238 222 208 239 287
Total Current Assets 501 882 706 781 888 1,000
TOTAL ASSETS 1,539 1,664 1,602 1,794 2,259 2,554
Creditors & Accruals 16 43 27 25 29 35
Other Creditors 635 920 814 946 1,088 1,306
Short Term Loan 1 34 55 41 45 48
Taxation 12 18 27 31 21 25
Total Current Liabilities 664 1,014 923 1,044 1,183 1,414
Long-Term Loans 0 0 24 36 19 0
Provision for Gratuity 34 37 43 27 63 15
Total Non-Current Liabilities 34 37 67 64 82 15
TOTAL LIABILITIES 1,504 1,619 1,557 1,743 2,204 2,493
Net Assets 35 45 45 51 55 61
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 44
Nigeria I Equities I Construction
Appendix 3: Financial Ratios – Actual and Forecasts
RATIOS 2007 2008 2009 2010 E 2011 E 2012 E
Growth
Turnover growth 39.0% 44.2% 31.9% 6.6% 15.0% 0.2
EBITDA Growth 13.1% 45.6% 81.9% -0.5% 21.4% 0.2
PBT Growth 182.8% 66.2% 80.2% -3.3% 8.9% 0.2
PAT Growth 6008.9% 41.8% 31.6% 29.5% 58.3% 0.2
Liquidity Ratios (x)
Current Ratio 0.8 0.9 0.8 0.7 0.8 0.7
Quick Ratio 0.6 0.7 0.6 0.6 0.6 0.6
Cash Ratio 0.1 0.2 0.1 0.1 0.1 0.0
Days in receivables 116.6 121.7 112.0 120.5 125.1 122.6
Days in payables 25.3 13.4 13.6 10.8 10.0 9.7
Profitability
Return on Average Equity 36.3% 40.9% 45.6% 52.5% 75.6% 82.5%
Return on Average Assets 2.0% 2.2% 2.3% 2.5% 3.5% 3.7%
EBITDA Margin 11.1% 11.2% 15.4% 14.4% 15.2% 14.6%
EBIT Margin 3.6% 4.0% 5.1% 6.8% 6.9% 6.2%
PBT Margin 4.0% 4.6% 6.3% 5.7% 5.4% 5.5%
PAT Margin 2.2% 2.2% 2.2% 2.7% 3.7% 3.8%
Per Share Data
Earnings Per Share 1.5 2.1 2.7 3.6 5.6 6.9
Dividend Per Share 1.3 1.8 2.4 3.0 4.8 5.9
Net Assets Per Share 4.7 5.5 6.5 7.0 7.9 8.9
Sales Per Share 65.9 95.0 125.3 133.6 153.6 184.3
Valuation Multiples
P/E (x) 37.8 26.7 20.3 15.6 9.9 7.7
P/B (x) 11.9 10.1 8.5 7.9 7.1 6.2
Dividend Yield (%) 2.2 3.1 4.3 5.5 8.6 11.1
EV/EBITDA (x) 7.9 5.5 3.0 3.0 2.5 2.1
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 45
Nigeria I Equities I Construction
INVESTMENT RATINGS
Vetiva uses a 5-tier ratings system for stocks under coverage: Buy,
Accumulate, Neutral, Reduce and Sell.
Buy ≥ +25.00% expected absolute price performance
Accumulate +10.00% to +24.99% expected absolute price performance
Neutral +5.00/+9.99% range expected absolute price performance
Reduce -5.00% to +4.99% expected absolute price performance
Sell < -5.00% expected absolute price performance
Definition of Ratings
Buy rating refers to stocks that are highly undervalued but with strong
fundamentals and where potential return in excess of or equal to 25.00%
is expected to be realized between the current price and analysts‟ target
price.
Accumulate rating refers to stocks that are undervalued but with good
fundamentals and where potential return of between 10.00% and
24.99% is expected to be realized between the current price and
analysts‟ target price.
Neutral rating refers to stocks that are correctly valued with little upside
or downside where potential return of between +5.00 and+9.99% is
expected to be realized between current price and analysts‟ target price.
Reduce rating refers to stocks that are overvalued but with good or
weakening fundamentals and where potential return of between -5% and
-+4.99% is expected to be realized between current price and analysts‟
target price.
Sell rating refers to stocks that are highly overvalued but with weak
fundamentals and where potential return in excess less than -5% is
expected to be realized between current price and analysts‟ target price.
Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 46
Nigeria I Equities I Construction
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Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 47
Nigeria I Equities I Construction
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Nigeria I Equities I Construction
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