Rating action ICRA Lanka Limited, Subsidiary of ICRA Limited, Group Company of Moody’s Investors Service has reaffirmed the Issuer rating of [SL]A+ (pronounced S L A plus1) with Stable outlook for Access Engineering PLC (“AEL”/ “the Company”).
ICRA Lanka has also reaffirmed the Issue Rating of [SL]A+(pronounced S L A plus) with Stable outlook for the Company’s Senior unsecured redeemable debenture programme amounting to LKR 5,000 Mn. Rationale ICRA Lanka has taken a consolidated view on Access Engineering PLC and its subsidiaries as a whole, in reaffirming the ratings, given the operational and financial linkages among them.
The reaffirmation of the ratings takes into consideration the longstanding track record and established position of Access Engineering group as a leading Engineering, Procurement and Construction (EPC) contractor in Sri Lanka. AEL has significant experience in the design and construction of Roads & Bridges, Mid-Rise Buildings, as well as foundations & sub-ground work for high-rise buildings. Further, AEL also has varied experience of undertaking EPC works in engineering segments such as water infrastructure, telecommunications, ports, airports, etc. AEL (Consolidated level) operates mainly in four sectors i.e. Civil Engineering, Construction Material Sales, Commercial Real Estate, and Automobile Dealership. For the FYE2019, Civil engineering segment contributed approximately 54% of AEL’s revenues, while the auto dealership segment contributed~34%, construction materials segment contributed~ 10% and the remaining ~2% was contributed by the commercial real estate operations of AEL.
The ratings also take into consideration the professional management team of the Company, the healthy relationships with various stakeholders in the construction industry and, the reputation in the industry for technology-innovation and timely delivery compared with the industry competitors. These apart, ICRA Lanka takes comfort in AEL’s healthy order book position with diversified ongoing construction contracts/projects.
The ratings also factor in the group’s comfortable profitability metrics, which are characterized by healthy operating profit margins (OPBDITA margin 14.40% in FY19, vis -a-vis 12.30% in FY18) and strong capitalization with low gearing level of 0.4(x) as of March 31, 2019. During Q1FY2020, given the improvements in working capital cycle, the Company has settled its short term/working capital debts and therefore, currently the Company’s debt profile represents only the debenture programme amounting to LKR 5,000 Mn (at standalone level). ICRA Lanka further draws comfort from the Company’s current liquid investment/cash position as well as the Company’s access to larger undrawn sanction lines.
Although, the Company has larger debenture-repayment commitments, that fall due in FY2021, the Company’s liquidity position is further supported by the expected positive internal accruals, increased dividend income from its real-estate subsidiaries and also from the assets/investment disposal plans under the Horizon Properties, as envisaged.
However, any larger capital commitments (than expected) towards new real-estate subsidiaries, would exert some pressure on the overall liquidity position of the Company going forward. The ratings also factor in the susceptibility of the Company’s financial performance to Sri Lanka’s macroeconomic conditions (such as volatile interest rate, depreciation of Sri Lankan rupee etc) and the Government’s policies on the construction industry.
The Stable outlook reflects ICRA Lanka’s expectations that AEL will continue to benefit from its healthy order book position as well as the Company’s growing real-estate business segment. Credit strengths Leading Construction and Engineering group in Sri Lanka; Access Engineering PLC (AEL) has a longstanding presence in the Engineering, Procurement and Construction (EPC) business in Sri Lanka.
The Company is one of the top three construction contractors in Sri Lanka. The Company’s in-house services offer fully integrated project solutions including Project Design, Piling etc., whilst the Company also has its own materials supply chain, an island-wide network of quarries, crusher plants, asphalt plants and concrete batching plants. This has helped the Company to have better control over the construction projects.
The majority of contracts are carried out by the Company, while the sub-contract work is only limited to supply of labour (and this is also on a back to back basis). This has helped the Company to record relatively higher operating profit margins compared to other competitors in the industry. Experience of the promoter/s and the management:
The Company and the Group as a whole have been driven by the rich promoter experience and the strong and experienced management team in place, which has guided the Company through several business cycles. The Company has a relatively strong corporate structure in place with well-planned succession management policies and also has a better corporate governance structure. This has ensured business continuity over the past several decades.
The management attends to their business-related issues promptly and this has helped the Company to successfully manage its operational challenges much faster than other competitors. Increased order book position; Although, the construction industry in Sri Lanka during the past two years has slowed down, the Company has been able to secure the highest number of construction contracts during this period.
This was further witnessed during FY2019 as the Company (standalone level) has outperformed the sector with a top-line growth of~ 7-8 %. Since Sri Lanka’s construction industry is on a long-term growth trajectory (despite short term slowdowns), the Company intends to bid selectively only for lucrative contracts and thereby benefit from the increased opportunities.
AEL being a leading construction-company in Sri Lanka, is expected to further benefit from these new development projects in the medium/long term. ICRA Lanka takes comfort from the current order book position of~ LKR 43 Bn as compared with LKR 40 Bn, in the previous year.
The construction of the central express way project will be a major infrastructural project of the Company over the next year. During FY2019, this project has accounted for approximately 30% of the Company’s revenue (at standalone level).
Recently the Company has been able to secure lucrative new construction projects, which are collectively valued at~ LKR 10 Bn. Therefore, the ability of the management to 3 successfully manage the ongoing construction project-risks while growing the revenue contribution, will remain to be reviewed going forward.
Diversification into the real-estate sector; In view of AEL’s concentration in the EPC segment, the Company is looking at diversification by entering into asset and real-estate businesses. Currently, the Company has invested in several real-estate projects. Blue Star Realties (Pvt) Ltd is a joint venture of the Group, which is into the real-estate segment of Sri Lanka.
Moreover, AEL has invested cumulatively around LKR 2.7 Bn in “Harbor Village”, which is a mixed development project, with other shareholders being China Harbor Engineering Company Ltd and Mustafa’s Pvt Ltd (Singapore).
Going forward, this project is expected to contribute largely towards the overall profitability of the group. The financial performance of Access Realties has improved noticeably during FY2019, following the increased revenue/other income contribution from Access Tower-II, which was fully completed in FY2018.
Hence, no financial support from the standalone level is anticipated towards these businesses. Moreover, ICRA Lanka takes comfort from the Company’s increased dividend-upstream policy from Access Realties Pvt Ltd, given the Company’s larger debenture payment commitments in FY2021. ICRA Lanka will also continue to monitor the progress of the large scale, Harbour Village project and the ability of the management to successfully implement the initial stages of this investment as envisaged, while managing the project-related risks will remain to be reviewed going forward.
Profitable Operation; the group’s revenue has increased by ~YOY 25% to LKR 32.5 Bn in FY2019 from LKR 26.15 Bn in FY2018. The Company’s key construction projects, such as the construction of central expressway and the town east water supply projects have further progressed and therefore, the Company’s operating profit margin has increased noticeably during FY2019.
This along with the improved financial performance of Access Realties Pvt Ltd, have helped the Company to increase the net profits to LKR 2,245.4 Mn inFY2019 from LKR 1,501 Mn (adjusted for capital gains) in the previous year. Backed by relatively comfortable profitability margins in the past, and coupled with the sizable proceeds from the debenture programme of LKR 5 Bn in FY2016, AEL has been able to maintain strong capitalization metrics with relatively low gearing level at the standalone level.
Further, it had sizable cash and short term liquid investments of ~ LKR 6 Bn in FYE2019 (at the consolidated level) which could be utilized towards additional working capital requirements, given the increasing working capital requirements of the Access Engineering Group. AEL’s subsidiaries –Sathosa Motors and Access Projects together had total borrowings to the extent of ~LKR 3.3 Bn in FYE2019 (which is largely from Sathosa Motors PLC). Access Realties and Sathosa Motors have well-established operations with positive cash flows and adequate debt servicing ability and hence no financial support is generally anticipated towards these businesses. A substantial portion of the debts taken up by Sathosa Motors during FY2019 was utilized to increase the capacity levels (including the purchase of land and construction of new workshop). Credit challenges Increased competition and negative industry/economic outlook; During CY2018, the construction and engineering sector in Sri Lanka has experienced a contraction of ~2.1% compared to a YOY 3.1% growth in CY2017.
Therefore, during CY2018, the macro-economic outlook of the construction industry (especially the state-funded projects) has been affected to an extent because of delays in the Government decisionmaking process, depreciation of the rupee, and changes in the corporate tax structure.
Though the Company was not affected significantly in the FY 2019, if this industry downturn continues further into FY2020/21, the Company’s performance is likely to be affected to an extent, notwithstanding the current healthy order book position of the Company. During the past two years, the Company’s higher margin-key construction projects (such as central expressway and towns east water supply project) had experienced some delays due to red-tape in the government decision-making process and curtailed fiscal budgets.
Sri Lanka’s macro-economic conditions such as volatile interest rate, depreciation of Sri Lankan rupee and other policy directives of the government on the construction industry would likely have a direct impact on the overall performance of the Company.
The construction industry in Sri Lanka has faced many challenges including the shortage of skilled labour and raw material supply shortages (such as sand). Therefore, ICRA Lanka will continue to monitor these issues and the ability of the management to successfully manage these issues, will remain as a challenge.
During FY2019, overall debt level of Sathosa Motors has increased noticeably amidst the import-restriction regulations as well as weaker macroeconomic conditions that prevailed during this period (in addition to the capacity expansion as mentioned above). This has largely affected the overall debt levels of the Access Group and therefore, going forward, ICRA Lanka will continue to monitor the financial performance of Sathosa Motors PLC. Increasing working capital intensity; During FY2019 and Q1FY2020, the Company’s working capital intensity has further improved on account of reducing debtors and inventory levels.
However, during Q1FY2020, the Company has been able to secure/start another working capital intensive UDA housing development project, amounting to LKR 2.7 Bn. Therefore, ICRA Lanka forecasts a higher working capital intensity for the Access Engineering Group going forward, considering this project (at standalone level), the increasing exposures into the real estate segment and the increased working capital requirements of Sathosa Motors.
However, ICRA Lanka takes comfort from the Company’s healthy liquidity position with cash/short term investments of LKR 6 Bn(at consolidated level) in Q1FY2020. Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below.
About the Company: Access Engineering PLC (AEL) started its operations in 2001 as the engineering, procurement and construction arm of the Access Group. Promoted by Mr. Sumal Perera, Mr. Christopher Joshua, and Mr. Ranjan Gomez, the Access group, in addition to the aforesaid businesses, also has presence in telecom, healthcare, power & renewable energy, and information technology, under AEL and its subsidiaries.
Over the last 15 years, AEL has become one of the leading players in the Civil Engineering and Construction industry of Sri Lanka. The Company was listed on the Colombo Stock Exchange in March 2012, following an initial public offering. Since then, AEL has grown sizably with acquisitions of businesses, and by expanding its presence in construction, real estate and other segments.
In February 2012, Access Engineering acquired Sathosa Motors PLC (Sathosa), which holds the franchise for Isuzu commercial vehicles. Also, Sathosa’s subsidiary – SML Frontier Automotive (Pvt.) Ltd. –is the sole agent for Jaguar Land Rover in Sri Lanka.
This apart, Access Realties (Private) Limited, which owns a commercial office property – ‘Access Towers’ – and its subsidiary, Access Realties 2 (Private) Limited, which has developed another commercial property – “Access Tower II”, are fully-owned subsidiaries. Harbour Village Pvt Ltd, a subsidiary of AEL, is engaged in the business of real-estate sector in Sri Lanka with its first mixed development project-Marina Square, Colombo with 1,068 units and 150,000sq. ft of commercial space facilities.