Access Engineering: BUY - Acuity€¦ · (ARL) and Sathosa Motors (SMOT) meanwhile, operate in the...

ACUITY STOCKBROKERS RESEARCH | SRI LANKA EQUITIES

Access Engineering Construction & Engineering

Research Team Chethana Ellepola | (+94) 112 206 256 [email protected]

Anjula Nawarathna | (+94) 112 206 255 [email protected]

Anouk Weerasinghe | (+94) 112 206 254 [email protected]

Nilruk Soysa | (+94) 112 206 254 [email protected]

Access Engineering: BUY

Source: Getty Images

mailto:[email protected]




June 2014



Investment Summary

Two-Year Performance: AEL vs. ASPI

Top 10 Shareholders (as at 31st March 2014)

Mr. S J S Perera 25.00%

Mr. R J S Gomez 12.00%

Mr. J C Joshua 10.00%

Mrs. R M N Joshua 7.00%

Mr. S J S Perera 4.60%

Mrs. D R S Malalasekera 4.50%

John Keells Holdings PLC 4.00%

Employees Provident Fund 3.29%

Mr. S A A Gomez 2.50%

Mr. S D Munasinghe 2.40%

Access E

ng

ineerin

g: A

EL

.N/A

EL

SL E

qu

ity

ACCESS ENGINEERING PLC

Price 23.1

Bloomberg AEL SL Equity

Market Capitalisation (Rs. Bn) 23.0

Market Capitalisation (USD. Mn) 175.7

Issued Quantity (Mn) 1,000.0

Month to Date Turnover (Rs. Mn) 10.9

Year to Date Turnover (Rs. Mn) 706.1

Current Trading Range (Rs.) 23.10 - 23.20

Year to Date High (Rs.) 23.90

Adjusted All Time High1

26.70

Financial Year ended 31st March

Key Financials Period FY 2011/12 FY 2012/13 FY 2013/14 FY 2014/15E FY 2015/16E

(LKR millions except per share data)

Revenue 7,320 13,900 16,409 21,526 24,703

Rev. Growth (Y-o-Y) 101% 90% 18% 31% 15%

Operating Profit 1,931 2,433 3,227 3,837 4,405

Op. Profit Growth (Y-o-Y) 44% 26% 33% 19% 15%

Profit Before Tax (PBT) 2,033 2,672 3,371 3,959 4,527

PBT Growth (Y-o-Y) 47% 31% 26% 17% 14%

Net Profit2 1,733 2,378 2,867 3,387 3,887

Net Profit Growth (Y-o-Y) 80% 37% 21% 18% 15%

EPS3 1.73 2.38 2.87 3.39 3.89

NAVPS3 10.67 12.49 14.95 17.39 20.30 Sources: Company Annual Reports, Acuity Estimates & Bloomberg

Note:1. Adjusted for rights, splits, bonuses Price as at 05/06/14 2. Profit attributable to shareholders 3. Calculated on latest issued share capital

We believe AEL’s strong pending and pipeline project portfolio will be augmented by robust potential in its Property Development business and continued resilience from its Motors arm. The Group’s high solvency levels and strong asset quality meanwhile, amplify the stock’s value further. We estimate a forward EPS of LKR 3.4 (FY 14/15E) and LKR 3.9 (FY 15/16E), representing a CAGR of 16.4%. Given AEL’s historical trading range and its strong earnings potential, we believe a forward PER of 7.5x is warranted. In our view, the stock implies a 10.0%-26.0% upside to current prices and should trade in the LKR 25.40-LKR 29.15 range. We recommend a medium-term BUY.

Diversified Project Portfolio to Drive Medium-Term Revenue | AEL’s LKR 53.05Bn strong order book

is not contingent on a single business domain and reflects the country’s infrastructure development strategy. Given its pivotal role in prompting GDP growth, the GoSL’s mid-term development framework remains focused on 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 & Sanitation investment targeted at 0.3-0.4% of GDP and Ports & Aviation investment estimated at 0.1% of GDP. Prospects for the country’s construction sector consequently remain robust and we believe AEL’s wide-ranging order book capitalizes on these developments. Moreover, given that i) approx. 60% of the Group’s projects are foreign funded and, ii) AEL typically has JVs/ sub-contracts with the foreign principal providers, we see minimal default risk on the group’s project portfolio. We thus believe AEL’s strong medium term project portfolio will be supported by its negligible default risk.

Steady Growth in Auxiliary Segments Bolsters

Core Earnings Potential | Sri Lanka’s emergence as a

knowledge services hub and robust GDP prospects are likely to be key drivers within Property Development and Motors segments. Supply shortages in Colombo’s current office space imply strong occupancy rates and steady revenue streams from Access Towers I & II. Stronger GDP prospects meanwhile imply sustained demand for vehicle sales. SMOT’s foray into the high-margin luxury vehicle segment is also likely to boost motors revenue. We concede however, that susceptibility to import-tax changes and GDP growth downturns remain key risks for the segment.

AEL’s Strong Balance Sheet Adds Further Value

to Stock | AEL’s high solvency levels and strong asset

quality are evident through its low gearing ratios, strong receivables base and relatively young fixed asset pool. We believe an increase in near-term debt-levels is unlikely given i) the aggressive capex spend in FY 11/12 -FY 12/13 and, ii) AEL’s tendency to fund capex through IPO-funds and cash reserves. AEL’s strong trade and receivables base meanwhile is evident through its low (and declining) impairment provisions, and we believe this will continue going forward given AEL’s history of well-diversified funding sources.

June 2014



Access Engineering Ltd Investment Overview Segment Review

Bullish Construction Sector Prospects Drive Core Earnings

Steady Margins in Property Development & Motors Segments

Stock Value Augmented by Noteworthy Financial Position

Valuation

Attractive Fundamentals Support Forward Multiples

Summary Financials

Ta

ble 0

f Co

nten

ts

| 4

| 5

| 7

| 9

| 12

| 11

June 2014



capacity constraints in Colombo’s current office space. Sri Lanka’s increasingly strong presence as an IT/BPO/KPO hub is exerting pressure on an already constricted office space market. We thus believe that occupancy levels at ARL’s existing Tower I and proposed Tower II will remain strong at 90.0-95.0% levels. AEL’s topline growth is also likely to be aided by SMOT which has remained notably resilient despite the overall volatility in the Motors Industry. While we concede, that Motors segment earnings are highly sensitive to import-tax changes and GDP growth, we believe prospects for the segment remain relatively sound. In our view, GDP growth - which has been on a rebound since Q3’13 - is likely to pick up on the back of stronger private and public investment. Demand for SMOT’s products is thus likely to be sustained at relatively

steady levels. Moreover, given SMOT’s foray into the high-margin luxury vehicle segment, we believe prospects for the segment remain positive.

Subsidiaries ARL (100%) & SMOT (84.4%) Remain Key

Access Engineering Ltd (AEL)

Access Realties Pvt. Ltd (ARL)

Sathosa Motors Plc (SMOT)

Segment: Property Development• Owns/Operates Access Tower I• Owns 100% of Access Realties 2

(Pvt) Ltd

Segment: Motors• Franchise Holder for Isuzu• Owns 50% of SML Frontier

Automative (Pvt.) Ltd.

100% 84.42%

Segment: Civil Engineering

AEL’s robust earnings potential is reinforced by its strong balance sheet. Low gearing ratios, a strong receivables base and a relatively young fixed asset pool indicate the Group’s high solvency levels and strong asset quality. AEL’s gearing ratios are not only significantly lower than that of MTD Walkers (sole listed peer) they have also been on a downtrend. We do not foresee the Group’s low debt position changing near-term as i) most of AEL’s capex funding has been through either IPO funds or cash reserves and, ii) the FY11/12 - FY12/13 capex has been aggressive enough to mitigate the necessity for non-project specific capex. We also believe that the group’s low (and declining) impairment provisioning coupled with its strong funding base indicates the robustness of AEL’s most significant asset base, Trade Receivables. AEL’s impairment charge (as a % of Receivables) is significantly lower than that of MTD Walkers’ (0.03% cf. MTD Walkers’ 1.19%) despite AEL’s larger receivables base. In our view, this indicates AEL’s low default risk and thus highlights its strong asset quality.

We believe therefore, that AEL’s LKR 53.1Bn strong order book is supported by ARL’s robust potential and SMOT’s resilience while its strong financial position further amplifies its stock value. We forecast an EPS CAGR of 16.4% between FY 14/15E-15/16E and believe a forward PER of 7.5x is warranted. We thus expect the stock to trade at a premium of 10.0% - 26.0% and recommend a medium-term BUY.

Strong Order Book and Robust Subsidiary Performance Drive Earnings Potential

Investment Overview

The largest listed Construction company on the CSE, AEL serves as a key proxy to the country’s Construction sector. The group provides Construction and Engineering services in 10 areas of civil engineering including Roads & Highways, Water, Ports and Buildings. The Group’s subsidiaries Access Realties (ARL) and Sathosa Motors (SMOT) meanwhile, operate in the Property Development and Motors segments. We believe AEL’s short-medium term prospects will be driven by its well-diversified order book (worth LKR 53.1Bn) and supported by its well-established Joint Venture (JV)/strategic alliances with foreign contractors/developers (key in procuring business). In our view, AEL’s pending and pipeline projects mitigate the risk of over-dependence on a single business

domain and morphs with the country’s infrastructure development strategy. Given AEL’s profile as an infrastructure developer, the country’s infrastructure development policies and overall macro-economic & construction sector prospects remain the key determinants of revenue. The country’s post-war development strategy has unsurprisingly focused on infrastructure; and, given the key role infrastructure plays in increasing productive capacity, the GoSL’s medium-term development framework continues to focus on 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. Medium-term prospects for the country’s construction sector consequently remain robust and we believe AEL’s wide-ranging order book capitalizes on these developments. Moreover, 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 (eg: JVs or sub-contracts) with the foreign principal providers. We thus believe AEL’s strong medium term order book will be supported further by its minimal default risk.

AEL’s Project Portfolio Spans Roads to Air & Sea Ports

0

1

2

3

4

Water &Waste Water

Roads &Highways

Bridges &Flyovers

Buildings Air & SeaPorts

Nu

mb

er o

f P

roje

cts

Pending Award

Pipeline

AEL’s medium-term revenue prospects are also likely to be strengthened by steady margins in its subsidiary businesses ARL and SMOT. ARL’s historically strong occupancy rates have been buoyed by its long standing tenant pool (42% of tenants have been with ARL for >10 years), and we foresee steady margins from this segment particularly in the context of

Source: Company Data

Source: Company Annual Report

June 2014



Diversified Project Portfolio to Drive Medium-Term Revenue | Given its profile as an infrastructure developer, AEL’s revenue prospects are largely dependent on its order book. The GoSL’s infrastructure development policies and overall macro-economic & construction sector prospects are thus key determinants of revenue. In our view, AEL’s medium-term revenue is likely to be driven by its well-diversified project pipeline worth LKR 53.1Bn. The Group’s well-established Joint Venture (JV)/strategic alliances with foreign contractors/developers (a key component in procuring business) are also likely to buttress medium-term revenue prospects.

Determining AEL’s broader revenue projections requires gauging overall Construction sector prospects. Infrastructure rehabilitation and development has predictably been at the forefront of the GoSL’s post-war economic development plan. Roads form the backbone of Sri Lanka’s transport network with national highways accounting for over 70% of the country’s traffic. Given the backward linkage roads provide to the country’s overall economic development, the GoSL’s infrastructure development policy over the last few years has centered on Road & Highway rehabilitation & development. In FY 2013 for instance, a number of key projects including the Colombo-Katunayake Expressway, Southern Expressway (Phase II) and Outer Circular Highway (Phase I) were completed. AEL’s topline growth has consequently been driven by its Highways & Bridge Construction segments. Since FY 2009/10 (ie: post-war), these two segments have contributed an approx. average of 70% of total revenue (cf. 58% between FY’06/07-‘08/09. AEL’s involvement in some of the larger-scale road development/rehabilitation projects over the past few years has helped revenue grow at a 50.8% CAGR between 2009-2013. Road & Highway Projects Completed in 2013

Project Status

Colombo Katunayake Expressway Open for Traffic

Southern Expressway (Phase II) Open for Traffic

Outer Circular Highway (Phase I) Open for Traffic

Rehabilitate Padeniya-Anuradhapura Road Open for Traffic

Veyangoda Flyover Open for Traffic

Northern Road Rehabilitation Project:

Kandy-Jaffna Road Open for Traffic

Mulativu-Pulmoddai Road Open for Traffic

Oddusudan-Nedunkerny Road Open for Traffic

Conflict Affected Region Emergency Project: Open for Traffic

Paranthan-Poonaryn Road Open for Traffic

Northern Road Connectivity Project:

Dambulla-Galkulama Open for Traffic

Navatkuli-Karaitivu Jetty Open for Traffic

Vallai-Araly Open for Traffic

Manakulam-Mulativu Open for Traffic

Road Sector Assistance Project (Phase II) Good Progress

Rehabilitation & Improvement of Priority Roads (Projects 1 & 2) Good Progress

Road Network Develompent Project Good Progress

Govt. Guaranteed Local Bank Funded Road Rehabilitation Project Good Progress

Colombo District Road Development Project Good Progress

639Km Rehabilitated/ Bridges,

Culverts & Causeways Maga Naguma Rural Road Development Programme

Significant Revenue Contribution from Highway & Bridge Construction Segment

0%

20%

40%

60%

80%

100%

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

Water & Drainage Building & Other Highways & Bridges

War Ends

70% of Revenue from Highways & Bridge Construction

Lists on CSE

The national road network has not however, been the only aspect of the GoSL’s infrastructure development plan. In line with its vision to transform the country to a regional commercial hub, the GoSL has undertaken a number of capacity development initiatives across Aviation, Ports, Water Supply and Irrigation. AEL’s established presence in ten areas of civil construction has meant that its involvement in some of the key projects within these sectors has been high. In FY2012/13 for instance, the topline contribution from Water & Drainage Construction and Building & Other Construction was approx. 30% relative to approx. 18% immediately post-war. Given the strong correlation between the Construction sector and the country’s macro-economic prospects, GDP growth remains a key element in AEL’s growth prospects. Despite some headwinds to growth in 2012 and early 2013, Sri Lanka’s post-war GDP growth has averaged 7.4% Y-o-Y (cf. average of 5.9% between 2003-2009). In fact, GDP growth rebounded strongly in H2 2013 and we believe short-term GDP to be 7.5% Y-o-Y on the back of higher private consumption and continued growth in public & private investment. Construction Sector Growth Increases Post War

8.6% 8.5% 8.2%

9.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Q1 Q2 Q3 Q4

2007 2008 2009 2010 2011 2012 2013

Construction Sector Picks Up Post-War

More significantly though, medium-long term prospects for the Sri Lankan economy appear robust. IMF estimates place Sri Lanka’s potential GDP at 8.0% (cf. 4.5%-6.5% over the last

Country’s Medium-Term Construction Sector Prospects Bullish

Core Earnings Potential Robust

Source: Central Bank of Sri Lanka

Source: Company Annual Reports

Source: Department of Census & Statistics

June 2014



decade) with the contribution from TFP increasing 3.5 percentage points and capital deepening increasing its contribution by 3.0 percentage points. Given infrastructure’s role in increasing efficiencies, and hence productivity levels (a critical component in increasing a country’s overall productive capacity), the GoSL’s infrastructure expenditure is unlikely to ease in the short-medium term. Indeed, the GoSL’s commitment to continued public investment in infrastructure is evident in its medium-term development framework. Public investment expenditure 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 is expected to account for 0.3-0.4% of GDP while Ports & Aviation are likely to account for 0.1% of GDP.

Emphasis on Infrastructure Development Continues in Medium Term

2012 2013 2014E 2015E 2016E

% of GDP

Govt.Expenditure (Est.) 20.5% 19.7% 19.6% 19.9% 20.4%

Current Expenditure: 14.9% 14.1% 13.5% 13.7% 14.2%

Public Investment: 5.9% 5.8% 6.3% 6.3% 6.3%

Highways 1.8% 1.5% 1.5% 1.7% 1.6%

Ports & Aviation 0.2% 0.2% 0.1% 0.1% 0.1%

Power & Energy 0.4% 0.3% 0.2% 0.2% 0.2%

Water & Sanitation 0.4% 0.4% 0.3% 0.4% 0.4%

Irrigation 0.4% 0.4% 0.4% 0.4% 0.4%

Education & Health 0.6% 0.6% 0.6% 0.7% 0.8%

Rural Sector 1.3% 1.2% 1.1% 1.1% 1.0%

Local Clients Dominate AEL’s Project Base

0%

10%

20%

30%

40%

50%

RDA NWSDB Other* Mixed** Foreign

Domestic Public & Pvt. Sector Clients

In this context, we believe that AEL’s short-medium term revenue prospects will remain robust, particularly given its well-established client relationships with both foreign and local parties. We believe AEL’s pending and pipeline projects reflect a well-diversified order book that not only mitigates the risk of over-dependence on a single business domain but also evolves with the country’s infrastructure development strategy. Although we believe that Highways & Bridge Construction will continue to be a major contributor to total revenue, we view other segments - particularly, Water and Ports & Harbors - taking an increasingly prominent role in the medium-term.

AEL’s Projects Diversified Across Operating Segments

Ongoing Pending Award Pipeline

Number of Projects

Water & Waste Water 2 1 2

Roads & Highways 3 1 1

Bridges & Flyovers 1 3 1

Telecommunication 1 - -

Buildings - 2 -

Air & Sea Ports - 1 2

StatusCategory

Public Investment in Ports to Increase

Road Sector,

98%

2%

2014-16E

Road Sector,

96%

4%

2017-20E

Ports Share of Public Inv. Increases

We estimate Highways to contribute an average of 27.0% of total revenue in FY2014/15-2015/16E (cf. 52.1% over the past 7 years) while Bridge Construction contribution increases to 20.9% (from 7.9%), Water & Waste construction increases to 10.9% (from 8.7%) and Ports segment construction increases to 12.0%. Moreover, we believe that AEL’s topline growth will be supported by its diverse funding base. Infrastructure developers are dependent on medium-long term development projects making the risk of delayed or defaulted payments a significant risk factor. But AEL’s risk to this appears largely negligible. Not only have AEL’s well-established partnerships with both foreign and GoSL establishments ensured a low default rate, the majority (approx. 60%) of AEL’s projects are foreign funded. Given that all projects are backed by bank guarantees and that AEL typically has strategic alliances (eg: JVs or sub-contracts) with the foreign principal providers, the threat of default appears unlikely going forward. We thus believe AEL’s strong medium-term order book is likely to be reinforced by its negligible default risk. Majority of AEL’s Projects Foreign Funded

0%

20%

40%

60%

80%

100%

07-08 08-09 09-10 10-11 11-12 12-13

Private Sector ProjectsGovernment ProjectsForeign Projects (Multilateral & Bilateral)

Negligible Default Risk Reinforces Diversified Order Book

Core Earnings Potential Robust

Source: Company Website & Company Data

Source: Fiscal Management Report 2014

Notes: * Other Local Clients Source: Company Website ** Foreign+ Local Clients

Source: Mahinda Chinthana

Source: Company Profile: http://accessengsl.com/ael-profile/

June 2014



Core Earnings Buttressed by Steady Growth in

Auxiliary Segments | In addition to its core civil engineering operations, AEL has exposure to both Property Development (via subsidiary Access Realties (ARL)) and the Motors sector (via Sathosa Motors (SMOT): 84.4% Stake). Revenue from ARL has grown at a steady 4-year CAGR of 7.0% while SMOT’s contribution has grown on the back of AEL’s increased stake in the company. In our view, strong GDP prospects and Sri Lanka’s emergence as a knowledge services hub are likely to remain the key drivers within these two segments. We believe that steady margins in the short-medium term are likely to support AEL’s topline growth.

Steady Revenue Growth from Subsidiaries SMOT & ARL

0.0

1.0

2.0

3.0

4.0

LK

R B

n

Acquires 60% Stake in SMOT

Increases SMOT Stake to 84.4%

0.0

0.1

0.1

0.2

0.2

10/11 11/12 12/13 13/14

LK

R B

n

Rental Income

Vehicle & After Sales

AEL’s property development arm, ARL, owns and operates Access Tower 1, a 12 storey office complex located in Colombo 2 with 125,000 sq.ft of rentable office space. In 2013/14, the revenue contribution from ARL amounted to LKR 145.0mn, a 2.0% increase from LKR 142.1mn in 2012/13. Given Access Tower’s historic occupancy range of between 98-100% and established client-relationships (42% of the tenants have been with ARL for >10 years), we expect steady streams of rental income from ARL. Moreover, ARL’s status as a BOI-approved company implies a concessionary tax rate of 2.0% on revenue until 2025/26. We thus believe the revenue contribution from ARL to remain at the current levels over our forecast period. 84% of Tenants Have Been with ARL for >5 Years

<5 Years, 15%

5-10 Years, 42%

10-15 Years, 42%

Access Tower 1: Tenant Composition (FY 2012/13)

ARL’s Profit Margins Increase Post IPO

0%

20%

40%

60%

80%

100%

2008/09 2009/10 2010/11 2011/12 2012/13 2013/14

Net

Pro

fit

Mar

gin

Profit Margin Increases Post-IPO

Moreover, the company is in the process of developing an extension to the existing Tower, Access Tower 2. The new tower which is targeted at capitalizing on the supply shortage in rentable office space is likely to reinforce rental revenue from Tower 1. Construction on Tower 2 - a 25 storey complex with approx. 175,000 Sq.Ft of rentable office space - is expected to be completed by end- FY2015/16. Although this is beyond our forecast period, we expect revenue from Tower 2 to add approximately LKR 350.0Mn (per annum) to AEL’s topline (assuming 90.0% occupancy and a rent per square foot of USD1.5). Current Office Space in Colombo at Near Full Capacity

World Trade Centre 750,000 Operational 99% 260

Ceylinco House 175,000 Operational 96% 125

HNB Towers 350,000 Operational 100% 150

Access Tower 125,000 Operational 100% 130

Aitken Spence 180,000 Operational 95% 130

Orion City Phase 1 500,000 Operational 97% 110

Summit 180,000 Under Construction n.a 140

Orion City Phase 2 200,000 Under Construction n.a 110

PropertyLeasable Area

(Sq Ft)Status Occupancy Rent*

We believe 90.0% occupancy is justifiable given the existing capacity constraints in Colombo’s current office space. Sri Lanka’s increasingly strong presence as an IT/BPO/KPO hub is exerting pressure on an already tight office space market. In FY 2012/13 for instance, major office space in Colombo was at near full-capacity, indicating the dearth of quality office space in the country’s commercial capital. Given Sri Lanka’s emergence as a logistics and knowledge services hub therefore, we believe ARL’s newly constructed Tower 2 will have sufficient demand once operational.

Growing IT/BPO Sector Aids Access Tower II Demand

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2006 2012 2016E

Ear

nin

gs (

USD

Bn

)

Number Employees: 60,000

Number of Co's:300

Est. Number of Employees: 100,000 (Direct) & 150,00 (Indirect)

Estimated Earnings

Tight Office Space Supply Implies Continued High Occupancy Levels

Steady Margins in Property Development & Motors Segments

Source: Company Annual Reports & IPO Prospectus

Source: SLASSCOM

Source: Company Annual Report

Source: Jones Lang LaSalle_2012 & Echelon Magazine


June 2014



AEL’s topline growth is also likely to be aided by its Motors segment. In FY2011/12-12/13 for instance, Motors revenue contributed approx. 17% to the topline, (cf. 3% the previous year) as AEL increased its stake in subsidiary SMOT. Despite the overall volatility in the Motors segment, SMOT’s revenue has grown at a 4-Year CAGR of 29.5%. This growth is particularly noteworthy in the context of the sluggish demand in the Motors sector. Motor vehicle demand- which hit a peak in 2011- has since dropped sharply on the back of both i) frequent import tax changes and, ii) slowing GDP growth. Demand for light-vehicles – to which SMOT has a larger exposure- has consequently remained flat. Motors Segment Earnings Volatile as Vehicle Registrations Decline

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jun’07 Jun’08 Jun’09 June'10 June'11 Jun'12 Jun'13

LK

R B

n

Motors Sector Earnings (Qtly)

11%

12%

13%

14%

15%

2007 2008 2009 2010 2011 2012 2013 AtEnd July

% T

ota

l

Light Vehicle Registrations

But, SMOT – which is the franchise-holder for Isuzu – has remained largely resilient in this environment. GP margins have averaged 17.4% between FY2009/10-12/13 and, - more significantly - improved in FY 2013/14 (+28.0%). The increase in margins can be partly attributed to product portfolio diversification and the acquisition of new business lines. In FY2012/13, SMOT entered into a strategic partnership with SANY (Chinese heavy construction equipment and machinery) and acquired a 50.0% stake in Frontier Automotive (Pvt.) Limited, the authorized dealers for luxury automobiles Land Rover/Range Rover. While we concede, that Motors segment earnings are highly receptive to policy changes on import-taxes and GDP growth, we believe prospects for the segment are relatively sound. In our view, GDP growth - which has been on a rebound since Q3’13 - is likely to pick up on the back of stronger private and public investment. Demand for SMOT’s products is thus likely to be sustained at relatively steady levels. Moreover, given SMOT’s foray into the high-margin luxury vehicle segment, we believe prospects for the segment remain positive. We see topline growth averaging 10.0% in the next two years, and expect GP margins to range between 24.0%-26.0%.

SMOT to Remain Resilient on Back of Improving GDP Prospects

Steady Growth in Property Development & Motors Segments

Source: Acuity Research & Department of Motor Traffic

June 2014



consists of negligible amounts of long-term debt, MTD Walkers’ debt to equity ratio stood at 69.1% in FY 2012/13 (AEL: 0.16%). The portion of AEL’s assets financed by its debt was a minimal 0.12% relative to MTD Walkers’ Debt/Asset ratio of 27.0%. AEL’s financial leverage ratio too is lower than that of peer MTD Walkers, implying that a larger portion of MTD Walkers’ assets are financed through debt. AEL’s Better-Than-Peer Solvency Ratios

KAPI AEL KAPI AEL

Debt/Equity 33.1% 14.90% 69.1% 0.16%

Debt/Assets 18.0% 11.23% 27.0% 0.12%

Financial Leverage (x) 2.48 1.39 2.43 1.34

FY 12/13FY 10/11Leverage Ratio

Moreover, AEL’s Debt/Equity (D/E) ratio has been on a consistent downtrend since its IPO in March 2012. While, the IPO funds were partly raised for loan-settlement, the declining D/E ratio is noteworthy given the capital-intensive nature of AEL’s core operations. Other metrics of leverage have also been on a declining trend. In FY2013/14 for example, AEL’s Debt to Assets ratio stood at 0.14% (cf. 0.12% last year and 11.23% pre-IPO) while its financial leverage ratio stood flat at 1.34x cf. 1.39x pre-IPO.

Debt/Equity Ratio Declines Since IPO Fund Infusion

0.28%

0.16% 0.18%

10/11 11/12 12/13 13/14

14.90%

AEL's Debt/Equity Ratio Declines Post IPO

We believe AEL’s low debt position is unlikely to change near-term. Much of AEL’s recent capex expansion has taken place either through i) IPO funds or, ii) cash reserves, and we believe any additional capital expenditure is likely to be funded through the Group’s strong cash reserves (8% of total assets cf. 4% in FY12/13). Moreover, given AEL’s recent (FY 11/12 -

FY 12/13) capex spending (16.2% of sales cf. 6.8% in FY2012/13) we do not foresee aggressive near-term capital spending. The recent PPE additions imply longer useful lives (just 15.3% of Plant & Machinery’s cost has been depreciated up to FY 2012/13) mitigating the necessity for non-project specific capex spending. We thus expect marginal amounts of near-term capex spending most of which should be financed through the Group’s cash reserves.

AEL’s Solvency Levels Higher Than That of Listed Peer


AEL’s Strong Balance Sheet Adds Further Value to Stock | AEL’s robust earnings potential (and thus, stock value) is reinforced further by its strong balance sheet. AEL’s high solvency levels and strong asset quality is evident through a number of variables, such as its low gearing ratios, its strong receivables base and its relatively young fixed asset pool. As we detail below, each of these indicators highlight AEL’s strong financial position, implying additional value to that generated through core earnings.

Trade & Other Receivables Largest Component of B/S

2011/12 2012/13 2013/14

In % Terms

Property, Plant and Equipment 19% 22% 19%

Investment Properties 21% 16% 14%

Other Current Assets 7% 7% 4%

Inventories 13% 11% 10%

Trade and Other Receivables 20% 26% 26%

Other Current Financial Assets 2% 4% 14%

Short Term Deposits 6% 8% 6%

Cash and Cash Equivalents 11% 4% 8%

Other Non-Current Assets 1% 1% 1%

Total Assets 100% 100% 100%

Stated Capital 63% 54% 45%

Revaluation Reserve 0% 0% 1%

Retained Earnings 12% 21% 29%

Shareholder's Equity 75% 75% 74%

Total Equity 76% 76% 75%

Total Non-Current Liabilities 1% 2% 2%

Trade and Other Payables 10% 11% 14%

Other Financial Liabilities 11% 11% 8%

Other Non-Current Liabilities 2% 1% 1%

Total Liabilities 24% 24% 25%

Total Liabilities & Equity 100% 100% 100%

AEL’s strong solvency is evident through its low gearing ratios and declining long-term debt levels. AEL’s minimal gearing ratios are particularly significant given the group’s business profile. High leverage ratios are not unusual in capital-intensive sectors such as Construction. But, with long term debt of LKR 1.93Mn (FY 2012/13) and a debt to equity ratio of less than 0.2%, AEL’s high solvency level is especially noteworthy. While a peer comparison is difficult due to the fact that most of AEL’s direct competitors (eg: ICC, Maga) are not listed, we have compared AEL’s leverage ratios with that of MTD Walkers (sole listed competitor). In contrast to AEL’s capital structure which




June 2014



AEL’s strong asset quality is also evident through its Trade and Receivables position. As an infrastructure developer, AEL’s Trade & Receivables are unsurprisingly one of largest assets for the Group. Of AEL’s total asset base of LKR 16.6Bn, approx. 1/4th was Trade & Receivables reflecting the prototype composition of a Construction company’s assets. Trade Receivables Remain AEL’s Most Significant Asset

35%

16%

22%

26%

Other Assets*

Investment Properties

PPE

Trade & Other Receivables

More significantly however, the quality of these receivables (as gauged by the default level on them) has historically been high. As is evident through the impairment provision that the Group makes for its Trade Receivables, AEL’s annual impairment charge is, on average, a marginal LKR 1.2Mn cf. that of immediate peer MTD Walkers’ average impairment provision of LKR 43.0Mn. Given that AEL’s total Receivables base is larger than that of MTD Walkers’, the significance of its

low impairment charge is distinct. Between FY10/11 and FY 12/13, AEL’s Trade Receivables grew at an annual average of 67.1% cf. MTD Walkers’ annual average of 44.1%. By FY 2012/13, AEL’s total Trade Receivables stood at LKR 4.0Bn relative to MTD Walkers’ LKR 3.2Bn. AEL’s impairment charge (as a % of receivables) has consequently been significantly lower than that of MTD Walkers. In FY10/11, AEL’s impairment charge as a % of receivables stood at 0.11% cf. 5.94% for MTD Walkers’. More significantly however, the Group’s impairment provisioning as a % of receivables has been on a declining trend (0.03% in FY 2012/13 cf. 0.11% in FY 10/11) further indicating the group’s negligible default rate. AEL’s Declining Impairment Provisions Indicate Quality of Trade Receivables

0.11%

0.05%

0.03%

0.00%

0.04%

0.08%

0.12%

0.16%

2010/11 2011/12 2012/13

AEL's Impairment Provision as % of Trade Receivables

Declines as Provision Remains Unchanged Despite Increase in

Trade Receivables

AEL’s Impairment Charges Lower Than Peer KAPI’s Despite Larger Trade Receivables Base

0

1000

2000

3000

4000

5000

2010/11 2011/12 2012/13

AEL's Trade Receivables Higher than KAPI's...

-80

-60

-40

-20

0

MTD Walkers AEL

...But Its Impairment Provisions are Lower

AEL’s low default rate has largely been a function of its reliable funding sources. Delayed or defaulted payments on development projects remain a key risk for the group, but AEL’s well-established partnerships with both foreign and GoSL establishments have ensured a historically low default rate. The majority (approx. 60%) of AEL’s projects are foreign funded implying the low level of risk associated with such projects. Moreover, all of AEL’s projects are backed by bank

guarantees and AEL typically has strategic alliances (eg: JVs or sub-contracts) with the foreign principal providers underscoring AEL’s minimal default risk. We thus believe that the group’s low (and declining) impairment provisioning coupled with its strong funding base indicates the robustness of AEL’s most significant asset base, Trade Receivables. Majority of AEL’s Projects are Foreign Funded

ForeignFunded (56%)

Govt. Funded (21%)

Pvt. Sector Funded (24%)

Diverse Funding Sources Ensure High Quality of Trade Receivables


Source: Price Waterhouse Coopers, Global Gaming Outlook

Notes: * Other Assets include Current & Non-Current Source: Company Annual Reports Assets Including Cash & Equivalents & Financial Assets


Source: Company Profile: http://accessengsl.com/ael-profile/


June 2014



Valuation | Buy Based on our earnings growth estimates and a forward PER of 7.5x, we believe AEL is likely to trade at an upside range of 10.0-26.0%. AEL’s strong order book is well supported by its subsidiaries ARL & SMOT and we expect PAT (to shareholders) to grow at an annual average of 16.4% over the next 2 years. We estimate PAT to shareholders to reach LKR 3.4bn in FY2014/15E and an EPS of LKR 3.4, while 2015/16E PAT to shareholders is estimated to reach LKR 3.9bn resulting in an EPS of LKR 3.9. We thus estimate a target price range between LKR 25.40 – 29.15 for AEL. Valuation Range Analysis Provides LKR25.40-29.15

Price Range for AEL

0 10 20 30 40

PER Based Valuation

PBV Based Valuation

All-Time High/LowRange

Value Per Share (LKR)

13.50 29.30

32.7227.67

29.1525.40

LKR 27.67

To arrive at our target price range we have used a forward PE of 7.5x, which in our view is justifiable given AEL’s own historical trading range and forward market estimates. Although the Construction and Engineering sector currently trades at a PE of 15.7x, AEL’s immediate peer trades at a PER of 7.0x while its own PER has historically averaged 7.9x. We believe our target PER range is further validated by forward estimates of the market PER. Based on consensus estimates1, the 2-year forward market PER is estimated to be 10.3x relative to 13.1x currently. Although we concede that upside exists, we have anchored our target multiple on AEL’s historic trading range, and believe a forward PER of 7.5x for AEL is warranted. AEL’s PER has Historically Averaged 7.9x

6.0

7.0

8.0

9.0

10.0

11.0

Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14

Dai

ly P

ER

(x)

Historical PER has Averaged 7.9x

Thus, given a forward PER of 7.5x, and an EPS CAGR of 16.4% over 2 years, we believe AEL indicates strong upside value. We expect the stock to trade at a 10.0-26.0% premium to the current price in the medium term and recommend a BUY on this basis. We believe AEL’s LKR 53.1Bn order book is supported by robust potential especially from its Property Development business (ARL’s NP margins to remain at an average 85.0%) but also from the resilience of Motors business (SMOT’s GP margins to range between 24.0%-26.0%). AEL’s strong financial position meanwhile, amplifies its stock value, further justifying our recommendation. We thus expect the stock to trade at a premium of 10.0-26.0% to the current price and recommend a medium term BUY.

Notes: Source: Bloomberg Consensus Estimates

Relative Valuation Indicates Strong Medium-Term BUY

Attractive Fundamentals Support Forward Multiples

Source: Bloomberg

Source: Acuity Research Estimates & Colombo Stock Exchange

June 2014


Access Engineering Construction & Engineering Company Financials

FY 2011/12 2012/13 2013/14 2014/15E 2015/16E

LKR Mn (except per share data)

Revenue 7,320 13,900 16,409 21,526 24,703

Gross Profit 2,121 3,061 4,088 4,958 5,691

Other Income 76 59 211 60 60

Administrative Expenses (385) (643) (1,016) (1,119) (1,285)

Operating Profit 1,931 2,433 3,227 3,837 4,405

Profit Before Tax 2,033 2,672 3,371 3,959 4,527

Profit Attributable to Shareholders 1,733 2,378 2,867 3,387 3,887

FY 2011/12 2012/13 2013/14 2014/15E 2015/16E

Highways & Bridges 61.4% 44.8% 60.6% 53.9% 41.8%

Water & Drainage 6.6% 6.1% 6.9% 8.4% 13.5%

Building & Other 19.5% 26.7% 9.8% 9.8% 9.7%

Port (Air & Sea) 0.0% 0.0% 0.0% 7.9% 16.1%

Vehicle Sales & After Sales Services 2.9% 16.6% 18.9% 15.9% 15.2%

Other 9.6% 5.8% 3.9% 4.1% 3.7%

FY 2011/12 2012/13 2013/14 2014/15E 2015/16E

Gross Profit Margin 29.0% 22.0% 24.9% 23.0% 23.0%

Operating Profit Margin 26.4% 17.5% 19.7% 17.8% 17.8%

Net Profit Margin 23.7% 17.1% 17.5% 15.7% 15.7%

ROE 23.1% 20.5% 20.9% 20.9% 20.6%

FY 2011/12 2012/13 2013/14 2014/15E 2015/16E

EPS (Rs.) 1.73 2.38 2.87 3.39 3.89

DPS (Rs.) 0.27 0.50 0.60 0.85 0.97

Dividend Payout 15.6% 21.0% 21.0% 25.0% 25.0%

P/E (x)1

n.a 9.7 8.1 6.8 5.9

PBV (x)1

n.a 1.9 1.5 1.3 1.1

Net Asset Value/Share (Rs.) 10.67 12.49 14.95 17.39 20.30

Pro

fit

& L

oss

Sta

tem

en

tIn

ve

sto

r R

ati

os

Pro

fita

bil

ity

Ra

tio

s

Se

gm

en

tal

Co

ntr

ibu

tio

n t

o

Re

ve

nu

e

Notes: 1. On Current Prices Source: Company Annual Reports & Acuity Research Estimates

Research Team Chethana Ellepola (+94) 112 206 256 [email protected] Anjula Nawarathna (+94) 112 206 255 [email protected] Anouk Weerasinghe (+94) 112 206 254 [email protected] Nilruk Soysa (+94) 112 206 255 [email protected]

Sales Team

Deva Ellepola (+94) 112 206 220/221 [email protected] Prashan Fernando (+94) 112 206 222 [email protected] Kapila Pathirage (+94) 112 206 227/228 [email protected] Naren Godamunne (+94) 112 206 225 [email protected] Roshan Noah (+94) 112 306 237/257 [email protected] Arjuna Dasanayake (+94) 112 206 235 [email protected] Amarasena Liyanage (+94) 112 206 231 [email protected] Susil Fernando (+94) 112 206 234 [email protected] Navin Dullewe (+94) 112 206 230 [email protected]

Disclaimer:

“Distributed in Sri Lanka and abroad by Acuity Stockbrokers (Private) Limited (ASB) and its authorized representatives. ASB is fully owned by Acuity Partners (Pvt) Ltd (APL) and APL is a joint venture of DFCC Bank and Hatton National Bank PLC. The Information contained herein has been compiled from sources that ASB (“The Research Institution”) believes to be reliable but none of the Research Institution holds itself responsible for its completeness or accuracy. It is not an offer to sell or a solicitation of an offer to buy any securities. The Research Institution and its affiliates and its officers and employees may or may not have a position in or with respect to the securities mentioned herein.

The Research Institution and its affiliates may from time to time have consulting relationship with any company, which is being reported upon. This may involve the Research Institution providing significant corporate finance services or acting as the company’s official or sponsoring broker.

All opinions and estimates included in this report constitute judgment as of this date of the Research Institution and are subject to change or amendment without notice. The Research Institution has the copyright for this report and the views herein cannot be reproduced and/or distributed in any form without the explicit (written or otherwise) permission from Research Institution.

Chathura Siyambalapitiya (+94) 112 206 232 [email protected]

S. Vasanthakumar (+94) 112 206 250/251 [email protected] Dhammika Wanniarachchi (+94) 112 206 229 [email protected] Shivane Wijayaratnam (+94) 112 206 236 [email protected] Sameera Rajawatte (+94) 112 206 279 [email protected] Dilanjan Perera (+94) 112 206 278 [email protected] Rukshan De Mel (+94) 112 206 268 [email protected] Kumar Dias Desinghe (+94) 814 474 443 [email protected] Prasanna Semasinghe (+94) 814 474 443 [email protected] Thehani Weerasinghe (+94) 112 206 224 [email protected]

ACUITY Stockbrokers (Pvt) Ltd., (Company Reg: No-P.V.3310) ‘ACUITY House’, No. 53, Dharmapala Mw,

Colombo 03, Sri Lanka.

TEL : (+94) 112 206 206 FAX : (+94) 112 206 298







Access Engineering: BUY - Acuity€¦ · (ARL) and Sathosa Motors (SMOT) meanwhile, operate in the...

Documents

Transcript of Access Engineering: BUY - Acuity€¦ · (ARL) and Sathosa Motors (SMOT) meanwhile, operate in the...