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Business, Economy

Construction Firms See Tough Mid-Year as Margin Weakens, Cost Bites

Nigerian publicly-listed companies experienced an awful mid-year 2019 as players reported lower margin largely driven by significant jump in production and operational costs.

The construction industry in Africa’s most populous country is one of the most vibrant in the continent. But industry players especially the indigenous ones are struggling to stay afloat in Nigeria’s tough operating environment characterized by intense competition and limited prospects for business growth given the slow pace of economic expansion.

The players – Julius Berger (JB) and Arbico posted weaker profitability footing on the heels of higher cost. The combined direct cost of both companies nearly doubled to N104 billion in half-year 2019, representing 87 percent increase over N56 billion recorded a year earlier.

“The current state of the economy underscores the unimpressive performance of the sector,” said Emmanuel Noko, senior economist at M&C Research Institute.

“The fortunes of the sector are tied to stronger oil prices and faster economic growth. These are what give impetus to fund more capital projects by government.” Noko added.

While Julius Berger, the biggest listed player in the industry by market value, saw net income climb 9 percent higher to N2.8 billion in the six months through June 2019, from N2.6 billion a year ago, Arbico incurred N38 million net losses, after posting N71 million profit last year.

The net margin of Julius Berger slumped to 2.2 percent mid-year 2019 from N3.6 percent last year, while Arbico reported a loss margin of 1.4 percent compared with 3.3 percent in half-year 2018.

Meanwhile, direct cost margin of JB and Arbico trended to 77 percent and 82 percent respectively in half-year 2019, from 74 percent and 80 percent last year.

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Industry players say construction companies have been grappling with higher costs since the naira was devalued in 2017 which has led to a spike in the cost of importing building materials to the country.

“The cost of construction in Nigeria is one of the highest in Africa. This is even because over 65 percent of materials are sourced abroad,” Damilola Ijalade, a broker at DEE Property Consult said.

This implies that a weakening naira translates to a higher burden for construction firms purchasing raw inputs abroad.

The Nigerian construction industry is dominated by foreign players like Cappa & D’Albterto, ITB and CCECC, who keep getting bulk of government contracts, leaving the ‘powerless’ indigenous ones with crumbs to feed on.

There have been downsides to this as these companies have been known to import resources and even skilled labour as opposed to using local manufactured resources and promoting local content and promoting local content.

Although currency devaluation and economic downturn of 2016 impacted private sector investment, public spending on infrastructure has surged in recent years and expected to rise in short to medium-term.

Cash-strapped Nigeria is financially incapacitated to close the country’s huge infrastructural gap estimated at N3 trillion and this has prompted fiscal authorities to borrow cash from the private sector.

In addition to series of bond issuances that should ease budgetary constraints and boost capital spending, fiscal authorities have resorted to private-public partnerships to deliver big-ticket projects, which should keep the industry on the path of positive growth going forward.

The construction has been on a positive growth trajectory for three straight quarters through the first three months of 2019 when it grew 3.2 percent outperforming the broader economy that expanded some 2 percent.

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The implementation of the 2019 fiscal budget coupled with Buhari-led administration’s commitment to fix decrepit infrastructures hurting businesses and investment, these experts expect to help accelerate growth going forward.

Source: businessdayng

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