Access Engineering PLC Equity Research · 2015-08-03 · Price Behavior ASI movement (adjusted to AEL base price) AEL share price BUY LOLC SEC Valuation LKR 47.20 Share Price (11.00

15

25

35

45

11/14/13 02/14/14 05/14/14 08/14/14 11/14/14

LKR

Price Behavior

ASI movement (adjusted to AEL base price) AEL share price

BUY

LOLC SEC Valuation LKR 47.20 Share Price (11.00 a.m, 18.11.14) LKR 41.20 Upside/Downside +14.56% Risk Level Low (refer page 21 for recommendation guidance)

Share Details

Bloomberg Ticker AEL SL

CSE Sector Construction and Engineering GICS Sector Industrials Market Cap (LKR Mn) 39,073 Issued Quantity (Mn) 1,000 30-day avg T/O (LKR Mn) 30.11 Beta (6 months) 0.98

Investment Fundamentals

LKR Bn 2013A 2014A 2015F 2016F

Revenue 13.9 16.3 19.8 24.2 Net Profit 2.3 2.8 3.1 3.9 S/H’s Equity 12.6 15.2 17.8 20.9 Total Assets 16.6 20.2 23.2 26.9 ROA (%) 14 14 13 15 ROE (%) 19 19 19 19 PE (x) 8.3 7.9 12.8 10.2 PBV (x) 1.56 1.48 2.25 1.91

Per Share Details as at 30.09.14 (LKR)

Earnings per share (trailing 12m) 2.93 Net Asset Value per share 15.59 Sales per share (trailing 12m) 16.82

Business Nature

Access Engineering PLC (AEL) is primarily involved in

the business of construction activities. AEL’s subsidiaries

are engaged in property development and importing

motor vehicles.

Shareholder Details

Mr. S J S Perera 25%

Mr. R J S Gomez 12% Mr. J C Joshua 10% Shareholders below 5% 56%

Source: CSE, Bloomberg, LOSEC Research

Analyst(s):

Damith Wasantha

+94 117 880837

[email protected]

Access Engineering PLC

Initiation Coverage

18 November 2014 | LOLC Securities Research Publication

Recommendation Guidance, Important Disclosures and Analyst Certification: Page 21

Equity Research

Salient Sections of the Report

Revenue will be driven by construction sector boom (pg.2) | Operating margin of the

construction sector to be 15% (pg.4) | Sustainable ROE at 15% for AEL’s construction

sector (pg. 5) | Commercial property sector is yet to boom (pg.6) | Motor Sector to rise with

per capita and infrastructure development (pg.6) | Robust Group Financial Position (pg.8) |

Valuation (pg.10) | Sensitivity (pg. 11) | Earnings risk comment (pg. 11) | Appendices

(pg.12)

Spearheading the construction boom

We forecast the post-war construction boom to prevail for another 10-15 years in Sri Lanka

and thus we expect Access Engineering PLC (AEL) to reap substantially from the

opportunity, given its high expertise and credentials over its peers. AEL’s well diversified

business portfolio consisting motor sector and commercial property also reduces the risk,

while the group is in a safe position to further expand backed by its strong balance sheet.

Investment Considerations

Construction boom is taking place: Construction sector contribution to the GDP has

grown and stood at 10.3% in 2013 compared to 7.4% in 2008. We expect the construction

sector to contribute around 10% to the GDP for the next 10-15 years and a terminal

contribution rate around 3-4% (Malaysia’s and Thailand’s respective figures are within the

range of 3-4% for the last 10 years). We forecast a construction sector 5 year CAGR of 20%

and a terminal growth rate of 5%.

Sustained ROE backed by highest standards: Access Engineering has obtained C1 grading

in terms of all the sectors while it is the only company to achieve such a grading for all

sectors according to ICTAD ((The Institute for Construction Training and Development).

Room to grow for commercial property: Sri Lankan commercial rental prices are

approximately around USD 1.5 per sq.ft per month in Colombo while the figure is low

compared to regional peers. Access Realties commenced the construction of Access tower 2

in July 2013 and expects to complete in 30 months at a cost of LKR 2.5 Bn. This will add

further 135,000 sq.ft of rentable space to its current capacity of 125,000 sq.ft.

Motor sector to grow with per capita rise: New registration of motor vehicles has grown

at an average of 13% along with the per capita growth for last 10 years. However, vehicle

density (per capita and per Km) is still low compared to regional peers. AEL’s Motor sector

arm SMOT has maintained stable ratios compared to the volatile figures of its peers.

Low risk compared to peers: AEL’s focus would predominantly lie upon projects where

the funding is secured. Working capital risk is low compared to its peers.

Robust Financial position: AEL has maintained a solid cash and short term investments

above 10% out of total assets while debt/equity ratio is almost negligible. AEL has

maintained a stable dividend payout ratio at around 20% while ROE and ROA dropped

down from 2009 to 2012 with the rapid expansion of the business. However, we expect two

ratios to stabilize at 20% and 15% respectively.

Valuation

We assume a cost of equity of 14% taking the current market conditions into account.

Applying our forecasts, which includes an average 16% long-term NP margin target and a

terminal free cash flow growth rate of 5%, our FCFE model values the share at LKR 47.20. At

the current value the share is traded at a forward PE of 12.78 X and a forward PBV of 2.25X.

Initiation Coverage: Access Engineering PLC | 18 November 2014

2 | LOLC Securities Limited

-10%

-5%

0%

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10%

15%

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25%

30%

35%

40%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Thailand Malaysia Sri Lanka

0%

2%

4%

6%

8%

10%

12%

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Sri Lanka Malaysia Thailand

-20%

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013

Construction sector growth AEL's construction topline growth

KAPI's construction topline growth GDP Current Price growth

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2009 2010 2011 2012 2013

LK

R M

illi

on

s

Highways Construction Water and Drainage Construction

Bridge Construction Building and Other Construction

Revenue will be driven by the construction sector boom Sri Lanka’s post-war development strategy revolves around infrastructure. Public investment is targeted at 6.3% of GDP between 2014- 2016E, with investment in highways accounting for between 1.5-1.7% of GDP. Water and Sanitation investment is expected to account for 0.3-0.4% of GDP while Ports & Aviation are likely to account for 0.1% of GDP. Construction sector contribution to the GDP has grown and stood at 10.3% in 2013 compared to 7.4% in 2008. We expect the construction sector to contribute around 10% to the GDP for the next 10-15 years and a terminal contribution rate around 3-4% (Malaysia’s and Thailand’s respective figures are within the range of 3-4% for the last 10 years).We believe, the construction sector has more room to grow in Sri Lanka (Post war construction sector real GDP has grown at a 3 year CAGR of 18% compared to a pre-war 3 year CAGR of 7%). After 2009 the country recorded commendable real GDP growth rates while 2014 GDP growth rate is forecast at 7.5% by the Central Bank of Sri Lanka. Hence we forecast a construction sector 5 year CAGR of 20% and a terminal growth rate of 5% (10 year construction growth rate in Thailand is 5%, Malaysia 10%).

Graph 1: Construction sector GDP growth of regional countries Graph 2: Construction sector GDP as a % of Country GDP In Sri Lanka, major construction investments are funded by foreign parties while local contractors get involved in sub-contracts of such projects. Access Engineering PLC (AEL) is primarily engaged in construction sector projects while the group has subsidiaries specialized in automobile industry and property development. In FY13/14, construction sector accounted for 66% of the profits. AEL’s primary sector, construction made a five year CAGR earnings growth of 32%. The sector growth outpaced the overall construction sector growth of the country and its listed peer KAPI.

Graph 3: AEL’s topline growth with Country and Peers Graph 4: Revenue growth of AEL’s construction sub sectors

Source: Bloomberg, CBSL Source: Bloomberg, CBSL

Source: Bloomberg, CBSL Source: Bloomberg, CBSL

We forecast

country’s

construction

sector to grow at

a medium term

CAGR of 20%....

Thailand and Malaysia construction

sector is growing at around 5-10%

for the last decade after subsequent

to the construction boom those

countries had

Construction sector GDP/

Total GDP has dropped down

in regional two peers

Only in 2013, AEL’s revenue

growth was outpaced by peer

KAPI



AEL’s engineering segment top line growth can be attributed to its main contributor, roads and highways sub segment, which grew mainly in line with government’s initiative to rehabilitate the current road network as well as to develop new roads. Company’s capacity doubled during FY12/13 while the order book is expected to remain robust over the next two to three years with projects worth LKR 25 Bn in the pipeline according to company website. AEL’s topline growth is likely to be reinforced by well-established alliances with both foreign and local contractors/developers. Delayed or defaulted payments remain a key risk for infrastructure developers such as AEL, but we see this risk as negligible Approx. 60% of AEL’s projects are foreign funded and the group typically has strategic alliances (e.g.: JVs or sub-contracts) with the foreign principal providers. We forecast a five year CAGR of 25% for AEL (5% premium to our estimate on the construction sector) while a terminal growth rate of 5% on par with the country’s construction sector terminal growth.

Table 1: AEL’s 2-3 years Project Pipeline

Sector Projects in progress Client Project Size

LKR Mn Project

Completion Water and Waste Water Rehabilitation of Labugama & Kalatuwawa Water

Treatment Plants Fovarosi Vizmuvek ZRT (Budapest Water Works)

2,321 October 21, 2016

Kandana Water Treatment Plant Extension – Civil, Mechanical / Electrical and ICM Works

Salcon Engineering Berhad 703.6 March 23, 2015

Roads and Highways Rehabilitation & Improvements to Colombo – Kandy Road section from Kadawatha to Nittambuwa

Road Development Authority

7,131.7 March 11, 2015

Rehabilitation and improvements to Mannar Puttalam Road Project (C3)


1,537.2 September 30, 2014

Improvement and Rehabilitation Of Bangadeniya – Andigama Anamaduwa Road Project


2,571 October 29, 2014

China Development Bank Funded Improvement & Rehabilitation of Priority Road Project 2

Xi’an Dagang Road Machinery Co. Ltd/Road Development Authority

1,250 December 23, 2014

Telecommunication Dialog Optical Fiber Sprouts Connectivity Project

Dialog Broadband Networks (Pvt.) Ltd

584.7 October 31, 2014

Sri Lanka Telecom – New Subscriber Connection Project SLT 42 January 18, 2015

Piling Piling Works Construction of Proposed Mixed Development for the Access Realities 2 Pvt.Ltd

Access Realities Tower-02 Pvt.Ltd*

282.3

Piling Works for Shangri-La Hotel Development (Pvt)Ltd

Shangri-La Hotel Development (Pvt)Ltd

146.4 July 31, 2014

Piling works construction of 1777 housing units at Colombage Mawatha, Nawala

UDA / Venkateshware Global Construction

372.5 October 30, 2014

Buildings Nagananda International Institute of Buddhist Studies , Manelwattha Kelaniya

CHEC 1,329 December 01, 2014

Construction of Housing for relocation of underserved settlement in the city of Colombo at Henamulla (Phase II)

UDA 3,246 October 28, 2016

Relocation of underserved settlements project – Construction of 1137 housing units at Henamulla.

UDA 2,900 August 31, 2014

Total 24,596

*Access Realties Tower-2 Pvt Ltd is an internal customer

Accordingly, we

forecast AEL’s

construction

sector to grow at

a medium term

CAGR of 25%.....

Source: Company Website



-

500

1,000

1,500

2,000

2,500

0%

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35%

2007 2008 2009 2010 2011 2012 2013 2014

LK

R M

illi

on

s

Sector Operating Profit Sector Operating Margin

-

500

1,000

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Construction Materialproduction

AccessTowers

Motors Group

LK

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illi

on

Operating Margin Operating Profit

0%

5%

10%

15%

20%

25%

30%

35%

2008 2009 2010 2011 2012 2013 2014

AEL KAPI

Raw material 60%

Labor 20%

Energy 10%

Overheads 10%

Operating margin of the Construction engineering sector to be 15% AEL’s engineering sector GP margins dropped slightly over the past couple of years irrespective of the sector profit growth. This can be mainly attributed to the cost escalation in overheads and other components with the business expansion. Compared to other sectors, construction sector contributed a low operating margin in 2014 (17%) compared to the high operating margin region (30%) the sector provided in 2009-2011 period. The reduction in margin in recent years also depends on the nature of the project (i.e. Road Construction, Water Supply, Irrigation etc.)

Graph 5: Operating margins of AEL’s sectors Graph 6: AEL’s Construction sector Operating Margin

AEL’s construction sector cost structure is mainly dominated by raw material (60%) which consists of cement, quarry, steel and other metals etc. Most of the raw material is locally provided while Cement is being mostly imported from China while some of the raw material is being imported from India as well. Commodity volatility in world markets does not affect much as the construction prices are regulated as construction projects has a lengthy life cycle. However, recent reduction in electricity cost and crude oil will reduce the energy cost (10%) of the sector while proposal for upward salary revisions could affect negatively on the margins. AEL’s construction sector has performed better than its listed peer MTD Walkers PLC (KAPI) in terms of operating margin. However, KAPI neared the margin figure of AEL in FY 13/14 reflecting the tough competition in the industry. Considering the above mentioned factors, we forecast a sustainable operating margin of 15% in the mid-long term.

Graph 7: Cost Structure of AEL’s construction arm Graph 8: Operating Margin performance with Peer Company

Source: Annual Reports, Prospectus Source: Annual Reports, Prospectus

Source: LOSEC Research Source: Annual Reports of AEL, KAPI and Prospectus

AEL’s operating

margin has come

down with the

business growth…….

Sustainable

construction sector

operating margin at

15% considering the

competition and

macroeconomic

parameters…….

AEL’s operating margins have

been higher than KAPI despite

recent improvement of the

peer



0%

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45%

FY 06/07 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 FY 12/13 FY 13/14

ROE ROA

-10%

0%

10%

20%

30%

40%

50%

FY 06/07 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 FY 12/13 FY 13/14

KAPI AEL

Sustainable ROE at 15% for AEL’s construction sector We believe the existing construction boom in the country to sustain for another 10-12 years backed by the government’s infrastructure project pipeline. The competition among the local companies is severe while most of the projects are also done by foreign contractors in which sub contracts are outsourced to local companies. AEL’s construction sector ROE came down to 17% compared to 25% in 2009. The reduction could be attributable to the margin contraction spurred by the high growth of the business and high competition (listed peer MTD Walkers PLC (KAPI) has leapfrogged from its negative figures to 20-25% ROE)

Graph 9: Construction sector ROE/ROA Graph 10: ROE comparison with peers ICTAD (The Institute for Construction Training and Development), the construction regulator in Sri Lanka provides a grading system for local construction companies, which is a screening process for the capabilities of prospective contractors to determine their general ability to undertake different types and sizes of projects without reference to any specific contract. Grading will be determined by evaluating a contractor mainly on his financial capability, the technical ability with staff and plant & machinery, and the experience gained in relevant fields. Access Engineering has obtained C1 grading (highest grading) in terms of all the sectors while we could not come across any other local entity which had achieved such an accolade.

Table 2: Grading System of ICTAD

Field Access Engineering PLC Maga Engineering (Pvt) Ltd

Sanken Construction (Pvt) Ltd

Nawaloka Construction Company (pvt) Ltd

Sierra Construction (Pvt) Ltd

HIGHWAY CONSTRUCTION C1 C1 C7 C1 C1

WATER SUPPLY & DRAINAGE C1 C1 C1 C3 C1

IRRIGATION & LAND DRAIN C1 C7 C3 C2 C1

DREDGING & RECLAMATION C1 C7 C7 C3 C7

BUILDING CONSTRUCTION C1 C1 C1 C1 C1

With the track record, we believe AEL is in a better position to grab construction opportunities compared to its peers particularly considering AEL’s positive relationship with Chinese entities, main foreign investor in post-war Sri Lanka (Refer SWOT analysis in appendix). Taking the high competition factor also into account, we foresee a sustainable ROE at 20% in short-mid run and 15% in the long run.

Source: Annual Reports, Prospectus Source: Annual Reports, Prospectus

Source: ICTAD

ROE can be

sustained at 15%

given AEL’s highest

qualifications and

rankings



454%

188%

178%

139%

68%

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00

Singapore

India-Delhi

India-Mumbai

Indonesia-Jakarta

Vietnam-Ho Chi Minh City

Malaysia-KL

Thailand-Bangkok

Sri Lanka-Colombo

Phillipines-Manila

India-Chennai

USD/sqft per month

-5

0

5

10

15

20

25

2010 2011 2012 2013

%

OSEA CSD ACCESS TOWER

0

10

20

30

40

50

60

70

80

90

100

2010/11 2011/12 2012/13 2013/14

%

OSEA CHOU CSD ACCESS TOWER

4%

Sector operating profit contribution

Commercial property sector is yet to boom Sri Lankan commercial rental prices are approximately around USD 1.5 per sq.ft per month in Colombo while the figure is low compared to regional peers. Hence we see a potential in the long run for commercial condominiums in the country. Access Realties commenced the construction of Access tower two in July 2013 and expects to complete in 30 months at a cost of LKR 2.5 Bn. This will add further 135,000 sq.ft of rentable space to its current capacity of 125,000 sq.ft. Due to low rental rates in the country compared to regional counterparts and lack of supply, we are of the view that effective yields could rise by approximately 50% over the next two to three years. Since this is identified as a BOI (Board of Investment) approved project, tax free importation of materials and the applicable 12 year tax holiday after commencing operations are expected to further enhance profit margins. Graph 11: Rental rates in regional countries 2013-14 AEL’s property sector However, current ROEs for commercial properties could be lower than the ROE achieved for the engineering segment, and hence could pull down Group ROEs in the short to medium term. Therefore we forecast a sustainable ROE at 5%.

Graph 12: EBITDA margin comparison with peers Graph 13: ROE comparison with peers

Source: A Cushman & Wakefield Research

Source: Annual Reports, Bloomberg Source: Annual Reports, Bloomberg

Property sector has

the potential to

grow as the

country’s rental

rates are

comparatively low



0

100,000

200,000

300,000

400,000

500,000

600,000

0%

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Per Capita Growth New Registration of Vehicles

0

50

100

150

200

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300

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400

Sri Lanka India Singapore Malaysia Thailand Pakistan

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Sri Lanka Indonesia Singapore Malaysia Pakistan China

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SMOT DIMO UML

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2011 2012 2013 2014

SMOT DIMO UML

13%

Sector operating profit contribution

Motor Sector to rise with per capita and infrastructure development

New registration of motor vehicles has grown by on average 13% along with the per capita growth of the country. However, vehicle density (per capita and per Km) is still low compared to regional peers. Therefore, we believe, the sector has the potential to grow along with the targeted per capita growth and the extension of road network.

Graph 14: Per Capita GDP Vs Motor Vehicle Registrations

Graph 15: Vehicles Density (per capita ‘000) Graph 16: Vehicles Density (per Km) AEL’s Motor sector arm SMOT acts as the sole agent of Isuzu vehicles in the country and its new venture, SML Frontier Automotive, is the exclusive authorized dealer for Land Rover & Range Rover vehicles in Sri Lanka. Through Land Rover’s strategy to introduce vehicles with affordable luxury and given SMOT’s ability to attract sales through modes such as government permits, we estimate the contribution towards the total turnover to increase to 20% in FY15/16. SMOT has maintained stable ratios compared to the volatile figures of its peers.

Graph 17: EBITDA Margins of peer companies Graph 18: ROE of peer companies

Source: CBSL, Motor Vehicle Department, Bloomberg

Source: Bloomberg, World Bank Source: Bloomberg, World Bank

Source: Bloomberg, Annual Reports Source: Bloomberg, Annual Reports

Motor sector growth

is backed by high

expectations on per

capita growth and

low penetration

compared to

regional peers

Per Capita GDP growth and

Vehicle registrations show a

positive correlation (10 year

coefficient of correlation is

0.24)



0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0

16,000.0

18,000.0

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Revenue EBITDA Net Inc Avail to Common Shareholders

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

ROE ROA

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40%

50%

60%

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80%

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100%

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Dividend Payout Ratio Cap-ex ratio

0%

5%

10%

15%

20%

25%

30%

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Debt/Equity Cash and Short Term Deposits/Assets

Robust Group Financial Position

AEL’s revenue, EBITDA and net profit have grown at a 5 year CAGR of 39%, 36% and 29% respectively. AEL has maintained a solid cash and short term investments above 15% while Debt/Equity ratio is almost negligible. AEL has maintained a stable dividend payout ratio at around 20% while ROA and ROE dropped down from 2009 to 2012 with the rapid expansion of the business. However, the two ratios seem to be stabilizing at 15% and 20% respectively.

Graph 19: Debt to Equity ratio comparison Graph 20: ROE and ROA

Graph 21: Capital Expenditure Graph 22: Cash Position and Debt/Equity Construction companies face working capital issues on the back of delayed payments mainly by government institutions, given the exposure to these entities are not appropriately managed. Despite AEL’s significant exposure to government initiated projects, these are predominantly funded by foreign funding or local bank funding which ensures timely payments. However, the projects, which are funded by the government, are mostly covered by bank guarantees, which mitigate the default risk. Despite the current low exposure to government entities, there’s a risk of increase in this segment in the future. However, AEL’s focus would predominantly lie in projects where the funding is secured.



Revenue has grown at a 5 year CAGR of 39%.

High exposure on

government funding

projects could cause

delays in receiving

cash….

ROA and ROE seem to

stabilize at 15% and 20%

respectively

Zero debt position for 3

consecutive years



0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

KAPI AEL

Graph 23: Receivables to Assets ratio Construction related companies are generally associated with high exposure to debtors as the business is contract-based. Despite high debtors level AEL’s debtors to assets ratio is below the respective ratio of its main listed peer, KAPI. Therefore, AEL’s comparatively in a safer position in terms of working capital risk. Revenue for the three months ended June 2014 recorded LKR 3,368 Mn, up by 6.8% compared to the previous corresponding quarter while net profit was almost stagnant at LKR 557. However, since the business is based on contracts, we find comparison between two quarters slightly unjustifiable. We forecast a sustainable 5 year revenue CAGR growth of 25% and a sustainable GP margin of 20%. AEL’s close ties with the country’s largest investor in the recent past, China, has proven to be effective due to its high participation in Chinese funded projects. We believe the Chinese entities would play an important role in the country’s large infrastructure projects in medium to long term. AEL recently entered into an agreement with Chinese entity (ZPMC) to establish a JV to service and maintain the container handling equipment in Colombo harbor. We believe, after the construction boom, companies in the industry would seek to grow either through regional expansion and diversification. AEL has already taken steps on both ends as they initiated a project in Papua New Guinea and entered into the Motor sector. However, AEL has more potential to grow with its rich cash position and low debt environment. According to the discussion we had with the management, we are positive on AEL’s outlook for such growth opportunities.

Hence we forecast a

10 year CAGR of

25% in revenue, GP

margin to stabilize

in 20% and ROE to

stabilize in 20%.

Source: Bloomberg, Annual Reports



Valuation From FY09/10 to FY12/13, the group generated free cash flow totaling LKR 2,048Mn, representing 24% of cumulative sales for the respective period. We have adapted a conservative approach to forecast earnings. We assume a cost of equity of 14% taking the current market conditions into account. Applying our forecasts, which includes an average 16% long-term NP margin target, medium term cash flow growth of 21% and a terminal growth rate of 5%, our FCFE model values the share at LKR 47.20. At the current value the share is traded at a forward PE of 12.78 X and a forward PBV of 2.25X. AEL’s has recorded high ROE values compared to local and international peers. Table 03: Valuation Sensitivity Matrix Table 04: Peer (including Regional) Comparison

Name Market Cap (USD Mn) PE Ratio PBV ratio Dividend Yield ROE

Access Engineering Plc 316 14.00 2.64 1.34 20.67

Mtd Walkers Plc 57 11.96 1.49 n.a 13.21

Lankem Developments Plc 4 n.a 0.89 n.a -39.05

Colombo Dockyards Plc 107 25.19 1.29 2.06 5.23

Chien Kuo Construction Co (Taiwan) 129 11.50 0.72 8.47 3.36

Daiichi Kensetsu Corp (Japan) 272 8.83 0.70 1.47 8.26

Share price in LKR

Cost of Equity

12% 13% 14% 15% 16%

Ter

min

al G

row

th

Rat

e

3% 52.90 47.00 41.00 38.10 34.80

4% 57.90 50.80 43.80 40.50 36.70

5% 64.30 55.60 47.20 43.40 39.00

6% 72.90 61.70 51.50 46.90 41.70

7% 85.00 70.00 56.90 51.30 45.10

Source: LOSEC Research

Source: LOSEC Research, Bloomberg



42.70

47.20

52.20

40.00

42.00

44.00

46.00

48.00

50.00

52.00

54.00

15% 20% 25%

LKR

Construction sector growth at current prices

46.20

47.20

48.30

45.00

45.50

46.00

46.50

47.00

47.50

48.00

48.50

10% 15% 20%

LKR

Per Capita GDP growth rate

45.90

47.20

48.70

44.00

44.50

45.00

45.50

46.00

46.50

47.00

47.50

48.00

48.50

49.00

1 1.5 2

LKR

Rental Price- USD per sq.ft per month

47.20 47.20 47.20

0

5

10

15

20

25

30

35

40

45

50

7% 12% 17%

LKR

Average interest rate

Summarized Sensitivity of Assumptions

Graph 24: Construction GDP growth sensitivity: strong Graph 25: Per Capita growth sensitivity: medium

Graph 26: Rental prices sensitivity: medium Graph 27: Interest rates sensitivity: weak

Earnings Risk Comment We assume the construction sector growth of 10% CAGR in the country in the next 10-15 years. However, construction booms are generally associated with short term bubbles and susceptible to market crashes. Prime example is the Dubai real estate crash which resulted in closure of many constructions related companies. Some excerpts from an article on the event published by grant-thornton (UK) on September 2010 are mentioned below. “The Dubai property market, where property prices once rose by around 80% in a single year, was one of the world’s fastest-growing and exuberant property markets. The property boom began in 2002, when the government issued a law legalizing foreign ownership of properties in selected areas of the city. Property developments like the Palm Jumeirah – an artificial island fanning out into the Persian Gulf, or the Waterfront, a city twice the size of Hong Kong Island, designed to house 1.5 million people. The bubble burst in late 2009 after Dubai World, a government-owned conglomerate behind the emirate’s massive property expansion, asked creditors for a six-month ‘standstill’ on its debt repayments. News of this request shocked investors and financial markets. The Dubai property prices fell 47% in the year to September 2009. The announcement by Dubai World accelerated the fall in prices. Construction slowed or ground to a halt, leaving some investors that had paid deposits for off-plan schemes out of pocket.” We believe the risk for an overtraded bubble creation is less in Sri Lanka with the boom is still in its early stages. Also certain regulations (curtailing foreigners to buy land) are being taken by the government to mitigate such future risks. In addition, local construction sector dependence on foreign party funding (mainly China) can also pose a threat at times of changing political dynamics. However, we are confident, even during such a political volatility, construction boom will sustain due to the potential in the country.

Source: LOSEC Research Source: LOSEC Research

Source: LOSEC Research Source: LOSEC Research

-10%

+11%

+3

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+2%

-2%



0

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03/27/12 06/27/12 09/27/12 12/27/12 03/27/13 06/27/13 09/27/13 12/27/13 03/27/14 06/27/14 09/27/14

RSI (14)

Appendices Table 05: Price Return

Graph 28: Share Price Movement

AEL ASI Index S&P SL 20 Index KAPI

3 months 54.81 8.36 8.76 120.88

6 months 78.63 19.15 19.45 135.78

1 year 81.74 29.49 30.91 177.24

3 year n.a 23.50 31.39 177.24

Source: Bloomberg

Source: Bloomberg

Highest Price as at 17.11.2014: LKR 42.20

Lowest Price as at 06.11.2012: LKR 14.80



0%

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2012 2013 2014

DPS Dividend yield

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04/22/12 10/22/12 04/22/13 10/22/13 04/22/14 10/22/14

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Graph 29: AEL PE Ratio behavior Graph 30: AEL PBV ratio behavior

Graph 31: AEL price to sales ratio Graph 32: AEL DPS and Dividend Yield

Graph 33: All Share Index PE ratio Graph 34: All Share Index PBV ratio

Source: Bloomberg Source: Bloomberg



14.09

9.52

7.81

2.8

1.74

1.34

1.26

1.14

1.02

14.75

12.69

9.95

2.05

1.67

1.45



Table 06: Forecast Financial Statements

Figures in LKR Mn FY 2011/12 FY 2012/13 FY 2013/14 FY 2014/15 (F) FY 2015/16 (F) FY 2016/17 (F)

Income Statement

Revenue 7,320 13,900 16,386 19,886 24,182 29,595

Cost of Revenue (5,200) (10,839) (12,202) (14,808) (18,008) (22,039)

Gross Profit 2,121 3,061 4,184 5,078 6,175 7,557

Operating Expenses (422) (676) (1,079) (967) (1,175) (1,438)

Operating Income 1,698 2,386 3,105 4,111 4,999 6,118

Net Non-Operating Gains (Losses) (420) (481) (414) (435) (443) (452)

Pretax Income 2,033 2,672 3,327 3,677 4,556 5,666

Income Tax Expense (297) (260) (428) (473) (546) (679)

Income Before XO Items 1,737 2,412 2,899 3,204 4,010 4,987

Net Profit att. to shareholders 1,733 2,376 2,832 3,129 3,917 4,874

Balance Sheet

Cash & Near Cash Items 1,641 703 1,521 3,386 5,662 8,432

Accounts & Notes Receivable 2,634 4,045 4,482 5,439 6,614 8,073

Inventories 1,817 1,860 1,949 2,365 2,876 3,510

Total Current Assets 7,643 9,063 12,878 16,116 20,078 24,941

Total Long-Term Assets 6,641 7,579 7,301 7,093 6,906 6,738

Total Assets 14,284 16,642 20,180 23,210 26,984 31,679

Accounts Payable 1,194 1,510 2,083 2,535 3,083 3,763

Other Short-Term Liabilities 2,060 2,230 2,535 2,535 2,535 2,535

Total Current Liabilities 3,277 3,759 4,644 5,097 5,646 6,328

Total Long-Term Liabilities 174 259 356 356 356 356

Total Liabilities 3,451 4,018 5,000 5,453 6,002 6,683

Share Capital 9,000 9,000 9,000 9,000 9,000 9,000

Retained Earnings & Other Equity 1,670 3,486 5,915 8,492 11,717 15,730

Total Equity 10,833 12,624 15,180 17,756 20,982 24,995

Total Liabilities & Equity 14,284 16,642 20,180 23,210 26,984 31,679

Cash Flow Statement

Net Income 1,733 2,376 2,832 3,129 3,917 4,874

Depreciation & Amortization 228 450 591 708 687 668

Changes in Non-Cash Capital (1,140) (1,234) (1,887) (921) (1,138) (1,413)

Cash From Operations 861 1,550 1,779 2,916 3,466 4,129

Capital Expenditures (1,559) (1,240) (609) (500) (500) (500)

Increase in Investments (2,261) (100) - - - -

Cash From Investing Activities (5,557) (1,971) (451) (500) (500) (500)

Dividends Paid (162) (500) (500) (552) (692) (860)

Change in Short-Term Borrowings - - - - - -

Cash from Financing Activities 4,116 (513) (518) (551) (690) (859)

Net Changes in Cash (580) (933) 810 1,865 2,276 2,770

Table 07: Forecast Ratios

Source: Bloomberg and LOSEC Research



Table 07: Forecast Ratios Statements

Profitability Ratios

GP Margin (%) 29% 22% 26% 26% 26% 26%

NP Margin (%) 24% 17% 17% 16% 16% 16%

ROE (%) 16% 19% 19% 18% 19% 19%

ROA (%) 12% 14% 14% 13% 15% 15%

Earnings per share (LKR) 1.73 2.38 2.83 3.13 3.92 4.87

Dividend per Share (LKR) 0.16 0.50 0.50 0.55 0.69 0.86

Credit Ratios

Debt/Equity Ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0

Interest Coverage (X) 17.0 11.0 13.4 - - -

Total Assets/Equity (X) 1.3 1.3 1.3 1.3 1.3 1.3

Net Debt/EBIT (X) 0.0 0.0 0.0 0.0 0.0 0.0

Liquidity Ratios

Current Ratio (X) 2.3 2.4 2.8 3.2 3.6 3.9

Quick Ratio (X) 1.8 1.9 2.4 2.7 3.0 3.4

Asset Turnover Ratio (X) 0.5 0.8 0.8 0.9 0.9 0.9

Net Asset Value per share (LKR) 10.8 12.6 15.2 17.8 21.0 25.0

Growth Ratios

Revenue Growth YOY% 101% 90% 18% 21% 22% 22%

Earnings growth YOY% 80% 37% 19% 10% 25% 24%

Total Assets YOY% 148% 17% 21% 15% 16% 17%

Total Debt YOY% -99% -68% -50% 0% 0% 0%

Investment Ratios

PE Ratio (X) 15.29 8.29 7.94 12.78 10.21 8.21

Price to Book Value (X) 2.45 1.56 1.48 2.25 1.91 1.60

Dividend Yield (%) 1% 3% 2% 1% 2% 2%

Source: Bloomberg and LOSEC Research



Company Access Engineering is engaged in areas such as roads and highway construction, water and drainage construction and bridge construction. They have expanded operations to building constructions, piling as well as the sale of construction related material such as ready mix concrete, asphalt, etc. In addition, AEL has operations in property management through Access Realties while motor sector representation is achieved through its subsidiary Sathosa Motors.

Access Realties (Pvt) Limited Registered by the Board of Investment, Access Realties (Pvt) Ltd., is focused on property development and is the holding company of Access Towers, a 16 storey modern office complex located within the corporate hub of Colombo. Built on 168 perches in Union Place, Access Towers stands out in all its architectural grandeur and functions as a landmark building. This 200,000 sq.ft. Building also offers 3 floors of parking (inclusive of the basement), which can accommodate 140 vehicles in total. Plans are presently underway for the development of ‘Access Tower 2’ which will be a modern 16 storey office complex, situated adjacent to the present Towers. Sathosa Motors PLC (100%) Established in 1962, Sathosa Motors PLC is the authorized agent for the world-renowned ISUZU brand of commercial vehicles in Sri Lanka and the Republic of Maldives. The Head Office premises, located in the corporate hub of Colombo, houses the new vehicles showroom, spare parts stores, sales office and the ISUZU repair workshop, while the main workshop is located in Peliyagoda. With a view to complement its core civil engineering business, Access Engineering PLC acquired the majority stake of Sathosa Motors PLC on 29th February 2012. ZPMC Lanka Pvt Limited (30%) The group has a 30% interest in ZPMC Lanka Company (Private) Limited, which has entered into a contract with Colombo International Container Terminal to service and maintain the container handling equipment supplied by Shanghai Zhenhua Heavy Industries Company Limited of China.

Access Engineering PLC

Access Realties (Pvt) Limited (84%)

Sathosa Motors PLC (100%)

ZPMC Lanka Pvt Limited (30%)



Individual 68%

Government 4%

Institutional 28%

Foreign 3%

Local 97%

Shareholder Number of Shares % Stake

1 Mr. S J S Perera 250,000,000 25.00%

2 Mr. R J S Gomez 120,000,000 12.00%

3 Mr. J C Joshua 100,000,000 10.00%

4 Mrs. R M N Joshua 70,000,000 7.00%

5 Mr. S J S Perera 46,000,000 4.60%

6 Mrs. D R S Malalasekera 45,000,000 4.50%

7 John Keells Holdings PLC 40,000,000 4.00%

8 Employees Provident Fund 32,507,921 3.25%

9 Mr. S A A Gomez 25,000,000 2.50%

10 Mr. S D Munasinghe 24,000,000 2.40%

11 Mr. S H S Mendis 24,000,000 2.40%

12 Mr. D A R Fernando 24,000,000 2.40%

13 Mr. A I Lovell 16,000,000 1.60%

14 Associated Electrical Corporation Ltd 13,000,000 1.30%

15 Barclays Bank PLC Singapore Branch (Wealth Management ) 8,000,000 0.80%

16 Watapota Investments PLC 8,000,000 0.80%

17 J B Cocoshell (Private) Limited 7,453,794 0.75%

18 MAS Capital (Private) Limited 6,000,000 0.60%

19 Mr. S E Captain 5,001,001 0.50%

20 Mr. H A Van Starrex 4,026,380 0.40%

Others 132,010,904 13.20%

Total 1,000,000,000 100.00%

Graph 35: Shareholder Structure 1 Graph 36: Shareholder Structure 2




Key Management Sumal Joseph Sanjiva Perera/ Chairman The Founder Chairman of the Access Group of companies established in 1989, he is also the Founder Chairman and shareholder of Access Engineering. He continues to be the Chairman of all companies under the umbrella of the Access Group and Managing Director of Sathosa Motors PLC, a company that achieved public listing in 1993. He is a Fellow Member of the Chartered Institute of Management Accountants - UK. It is under his vision and leadership that the Access Group of Companies has grown to be a diversified and successful business enterprise, in a span of a over 2 decades. Joseph Christopher Joshua/Managing Director One of the founder Directors of the Access Group of Companies, he was instrumental in heading some of the most successful business units within the Group. A founder shareholder, he was the Joint Managing Director/CEO of the Company. It was under his leadership that Access Engineering achieved significant milestones in growth. He also functions as the Joint Managing Director of the Access Group since 1997. Companies under his purview include Access Realties (Pvt) Ltd., Access Energy (Pvt) Ltd., Access Natural Water (Pvt) Ltd., Eco Friendly Power Developers (Pvt) Ltd., and business units of Access International (Pvt) Ltd. He is also a Director of Sathosa Motors PLC. Dalpadoruge Anton Rohana Fernando/COO Joining the Access Group in 1998 as an Engineer based in the Engineering Division, he played a vital role in enabling the division to become a separate business entity, encompassing the name and persons of Access Engineering. Having held senior management positions in Access Engineering, he was appointed to the Board in 2002. In 2007, he was appointed as the Director / COO of Access Engineering. He is a Corporate Member of the Institution of Engineers, Sri Lanka (IESL) and has a BSc Degree in Civil Engineering from the University of Peradeniya. He is also a Director of Access International (Pvt) Ltd., Sathosa Motors PLC and Eco Friendly Power Developers (Pvt) Ltd. History AEL was established in 2001 and came up with an IPO in March 2012 to seek a listing on the Colombo Stock Exchange (CSE) which was oversubscribed. With this initiative, 20% of new shares were introduced to the company, enhancing AEL’s equity by a further Rs. 5 Billion. AEL also became the first Greenfield construction company to be listed on the CSE, having the highest market capitalization within the ‘construction and engineering sector’. AEL’s major projects include the Sangupiddy Bridge across the Killali Lagoon in Jaffna, Hambantota International Airport project (Cargo and Fire Rescue Buildings, Airport Access Road, Fuel Hydrant for the Apron and a Water Tower), Trincomalee Integrated Infrastructure Project (design of 5 Major Bridges and construction of a major portion of the A15 Road), Harbour Rehabilitation Project (construction and design of Major Works at Hikkaduwa, Mirrissa and Puranawella Fishery Harbours), Hambantota Water Supply Project, Batticaloa Water Supply project, Design and build of 1137 housing units at Henamulla, Jaffna Rehabilitation & Improvement Project (3 major roads), Outer Circular Highway Piling Project etc. AEL won the Best Knowledge Integrator award presented by the National Chamber of Commerce Sri Lanka for the second consecutive year at the National Business Excellence Awards among the many other awards, Construction Performance Awards presented by ICTAD, Engineering Excellence Awards presented by the Institute of Engineers of Sri Lanka, etc. AEL is recognized as a major and specialized contractor by the National Contractors Association of Sri Lanka and ICTAD (Institute of Construction Training and Development) with Cl grading for six engineering sectors. The company has ISO 9001:2008 and ISO 14001:2004 accreditations for quality and environmental management systems and is a signatory to the UN Global Compact, the first construction company in Sri Lanka to achieve this status. AEL is now in the process of acquiring ISO 17025:2005 accreditation and OHSAS 18001:2007 accreditation.



Construction Sector In Sri Lanka construction sector (sub segment of the industry sector) accounts for the majority of the total investment as country is marching towards a rapid economic expansion after the end 30 year old war. Construction sector GDP stood at LKR 247 Bn (USD 1.9 Bn) in 2012 while the sector recorded a growth of 21.6% in 2012 (Graph1) compared to the GDP growth of 6.4% and industry sector growth of 10.3%. The growth rates started to pick after 2009 as major buildings and other infrastructure projects are being taken place in the transition period of the country (Graph 2). Institute of Construction Training & Development (ICTAD) and The Chamber of Construction Industry Sri Lanka (CCI) are the apex body and accredited representative of the domestic construction industry, while many state owned entities and private construction companies are registered under ICTAD. In addition, international contractors and Unregistered Informal Contractors carry out construction work in the country. The main state owned construction companies are State Engineering Corporation of Sri Lanka (SEC), Central Engineering Consultancy Bureau (CECB) and State Development & Construction Corporation (SD & CC). Main private sector companies are ICC, Sanken, Maga, Nawaloka, Tudawe and Access Engineering etc. Sri Lankan construction industry can be categorized under below main segments. i. Building construction ii. Highway construction iii. Bridge construction iv. Water supply & drainage v. Irrigation & land drainage vi. Dredging & Reclamation vii. Other constructions Building construction include housing and commercial buildings while other sectors can be categorized under infrastructure. Out of the subsectors, generally, building construction accounts for 50% of the total investments. Private sector participation remains significant in building, water supply & drainage and other construction sectors while other constructions mainly include Telecommunication, Power & Energy etc. 77% of the 2010 construction projects were above LKR 50 Mn investment value. Prices of raw materials used in the construction industry are rising which increases the total construction cost up. Main reason for the price increase is lack of availability of raw material. Availability of natural resources such as sand and bricks (made out of soil) is coming down drastically which has increased the prices rapidly of such resources. The price of illicit river sand used for construction has risen up with the tightening of restrictions on river bed mining in an effort to minimize the environmental damage. Transportation of sand and oil need to be obtained licenses which would also increase the price of the resources. Also due to the insufficient local production of cement, most probably half the portion of total cement requirement is imported to Sri Lanka. According to the growth in construction industry, demand for labor has risen while the supply seems not to be sufficient. Migration of skilled labor (especially to Middle East countries) has been one of the main reasons behind this. Due to this insufficiency of labor supply prices of labor tend to be increasing over the time which ultimately increases the cost of construction since it captures almost 12% of total construction cost. Construction Industry is heavily depending on debt where long term loans are one of the keys of funding large scale construction projects. Volatility of lending rates therefore has a negative effect on confidence of the investors considering the long life cycles of the project completion. As a result most projects tend to get completed with varied cost structures than budgets. However, as a measure to increase the money supply CBSL cut down the policy rates twice during the year. Accordingly AWPR (average Weighted Prime Lending Rate) responded shedding by 200 basis points from 13.5% to 11.5% from May to October 2013. CBSL’s recent policy rates cost would further reduce AWPR and we expect this phenomenon to entice the credit expansion with the low inflation position of the country. Therefore we expect more construction projects to get materialized in the future. *Company Overview, Industry, Key Management, History are taken from the extracts of Website, Annual Reports, Prospectus and LOSEC Research materials



SWOT Analysis Strengths -C1 grade in ICTAD rankings in all construction sectors -Existing distribution and sales networks -Strong relationships with Chinese construction sector companies -Robust cash position and low debt environment Weaknesses -Industry is associated with high amount of debtors -Unutilized funds Opportunities -Construction boom will provide new avenues of construction -Emergence of regional opportunities -Opportunities in commercial property -Low interest environment can trigger the credit growth helping the real estate sector And motor sector

Threats -Rising cost of raw material and energy prices -Shortage of skilled labor with growth -Severe competition from consisting players and threat of foreign entries -Future construction bubbles



Recommendation Guidance

BUY – expected return > 10% in excess of benchmark return

SELL – expected return less than benchmark return

HOLD – expected return between 0% and 10% in excess of benchmark return

Investment Horizon: 3 years

Benchmark Interest Rate: Average Weighted Fixed Deposit Rate (AWFDR) published by Central Bank of Sri Lanka.

Risk Level Evaluation

High: Maximum price volatility to be up or down more than 50% monthly

Medium: Maximum price volatility to be up or down between 25% - 50% monthly.

Low: Maximum price volatility to be up or down less than 25% monthly.

Risk Level is calculated taking the historical standard deviation measures.

Financial Glossary

EPS = Earnings per Share

ROA = Return on Assets (adjusted net profit/average total assets)

ROE = Return on Equity (adjusted net profit/average total equity)

CAGR = Compound Annual Growth Rate ((End Value/Start Value) ^ (1/number of years) -1)

GP= Gross Profit

EBITDA= Earnings before interest, tax, depreciation and amortization

PBT= Profit before tax

PAT= Profit after tax

NP= Net Profit

PBV= Price to book value ratio

PE= Price to earnings ratio

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Documents

Access Engineering PLC Equity Research · 2015-08-03 · Price Behavior ASI movement (adjusted to AEL base price) AEL share price BUY LOLC SEC Valuation LKR 47.20 Share Price (11.00