nigeria. construction industry report

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

[email protected]

Construction Industry Report A Haven of Opportunities

0.9

1.0

1.1

Dec-1

0

Jan-1

1

Feb-1

1

Mar-

11

Apr-

11

Vetiva Construction Sector Index

NSE ASI

YTD NSE ASI vs Vetiva Construction Index

(rebased Dec 31)

Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 1

Nigeria I Equities I Construction

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



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



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



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



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



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

36,790

0

5000

10000

15000

20000

25000

30000

0

30000

60000

90000

120000

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


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



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

-

10

20

30

40

14

15

16

17

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

160

320

480

640

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


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



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



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



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



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



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



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

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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



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



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



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



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



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



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



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



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



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



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



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



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



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



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


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


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%



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%



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



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



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



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



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



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



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



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



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


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 (%)


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



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”



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



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



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



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.



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