Construction Industry Report a Haven of Opportunities
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Construction Industry Report A Haven of Opportunities May 27th 2011 This report captures our view of the construction industry in Nigeria, Analyst essentially from an analysis of the intrinsic long term potentials in the Tosin Oluwakiyesi sector, which we believe is gradually being unlocked. On a company- [email protected] specific level, we focus on Nigeria’s construction giant – Julius Berger Plc, maintaining an “Accumulate” on the counter. Market Cap: N75.9Bn (US$506Mn) The next in line…? Amongst others, United Arab Emirate (UAE)‟s oil fuelled growth, China‟s industrial/export driven growth and the resultant construction Forward 2011 P/E: 9.9x boom in these economies over the last decade, are all pointers to the high EV/2011 EBITDA: 2.5x correlation between strong economic growth and the construction industry. Nigeria recently crossed the 7% growth rate, and has innate potential to record 2011 Div Yield: 8.6% higher growth. This, coupled with healthy revenues from strong oil prices and Sector YTD perf: 5.9% increasing investors‟ interest in bridging the infrastructure deficit brings one question to mind- is Nigeria next in line for a construction boom? Without being Recommendation: JBERGER unrealistically optimistic, we strongly believe the next decade will provide a Rating: Accumulate positive answer to this question. More than ever, the recent emphasis of all stakeholders on infrastructural development is noteworthy – we might just be Share Price: N55.71 close to seeing light at the end of the tunnel. Target price: N64.15 Latent opportunities; waiting to be unlocked: Across board, be it Expected Return: 15% road/bridges, rail, ports, or real estate, the opportunities are enormous but YTD NSE ASI vs Vetiva Construction Index latent. In real estate for instance, the demand for commercial real estate in (rebased Dec 31) 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, Vetiva Construction Sector Index NSE ASI 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 1.1 from frontier market average of 52.4 billion tonnes. In almost every yardstick of measuring infrastructural development, especially in transportation and real 1.0 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. 0.9 11 11 10 11 11 - - - - Risks...not as bad: Nigeria‟s operating environment, no doubt, has major - Jan Apr Feb Mar constraints, both from a policy and politics point of view. Notwithstanding, Dec Nigeria compares quite commendably relative to the big emerging markets – Source: NSE, Vetiva Research India, China and Brazil in some key metrics employed by the World Bank to compare general business environment, for the construction industry. One of Vetiva Capital Management Limited 266B Kofo Abayomi Street such metrics is “dealing with construction permits” in which Nigeria ranks 167th Victoria Island, Lagos th th (out of 183 economies) compared to India (177 ), China (181 ), Russia (182th), according to World Bank 2011 Ease of Doing Business Survey. Though, Tel: +234-1-46175213 the constraints in Nigeria are very inherent, comparatively, we think the risks Fax: +234-1-4617524 Email: [email protected] 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. Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 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 Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 1 Nigeria Equities Construction I I Nigeria’s construction sector – A dissecting look Nigeria‟s construction sector accounts for 1.4% of its GDP (Q3‟10 est.) More important, Construction output has lagged is the fact that despite the growth seen in the construction sector output, (7 year CAGR Crop Production, Crude Oil Production and Whole & Retail of 35%, see figure 1 below), its contribution to total GDP has remained at abysmally low Trade – the 3 biggest drivers levels. In 1981, the construction sector accounted for 5.8% of Nigeria‟s GDP and in the of Nigeria’s GDP since 1981 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 As at Q3’10, Construction infrastructure. Over the last three decades reviewed, crop production, crude oil accounts for 1.4% of Nigeria’s production and wholesale & retail trade have recorded a 27 year CAGR of 28%, 29% Gross Domestic Product (GDP), and 26% respectively, while the construction sector GDP grew at a CAGR 21% over the from 5.8% in 1981 same period. It is evident therefore that Nigeria is way below realising its potential in the construction industry. Figure 1: Building & Construction GDP and contribution to total GDP 6.0% 400,000 5.1% 7-yr 5.0% CAGR: 300,000 35% 4.0% 3.0% 200,000 2.0% 100,000 1.0% 0 0.0% 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 Source: National Accounts, Vetiva Research 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 Oil Wealth has been a Arabia, and more diversified oil producers like Russia, saw considerable boom in major driver of construction boom for oil construction at various peaks of oil booms in the last three decades. The crude oil price producing economies over boom of the 1970s for instance, sparked off the growth of UAE‟s construction sector. the last 3 decades Despite low crude oil prices in the 80s, key middle east economies, particularly Saudi Arabia and UAE managed to sustain its infrastructural development. Nigerian Construction Industry: A Haven of Opportunities I May 2011 I 2 Nigeria I Equities I Construction Oil fueled economic growth, favourable demograhic fundamentals, growing commercial activities and tourism, have caused considerable construction boom in these countries. Similar to others in the Gulf According to a 2007 report by “Economic Forum”, 15% – 25% of the world‟s Region, UAE has continued construction cranes were operating in the Gulf region with an estimate of over 2,100 to sustain the construction construction projects planned or underway. By 2009, UAE‟s contruction sector has boom originally sparked off grown very rapidly with construction accounting for c.11% of its GDP (almost sustaining in the 70s by discovery and the 10% average in the late 1970s). The recent crude oil price boom (2006-2008) also exploration of crude oil 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. Figure 2: Some OPEC Members Construction Sector GDPs 20000 8.0% 7.4% 16000 6.0% 6.0% 5.7% 12000 5.0% 4.0% 8000 2.0% 4000 1.4% 0 0.0% UAE Kuwait Qatar Saudi/Arabia Nigeria Construction GDP Sector Contribution to total GDP Source: Country National Accounts, Vetiva Research 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 China’s construction boom was