ASSIGNMENT – WORK PLACEMENT CANDOR RESEARCH Intern – Equity Research Candor Equities Limited Dulana Jayawardena Level 8, South Wing, Millennium House [email protected]46/58, Nawam Mawatha, Colombo 2, Sri Lanka +94766071350 SRI LANKA | CONSTRUCTION | EQUITY PRICE FORECAST 25.01.2016 ACCESS ENGINEERING PLC (AEL.N000) Forecast Price Bloomberg: AEL SL EQUITY 2017/18 CSE Ticker: AEL.N000 LKR 30-33 BUY KEY HIGHLIGHTS Renewed emphasis on infrastructure as Sri Lanka aspires to position itself as a thriving international hub. The continuation of the Colombo Port City Project, property development projects such as the Shangri La project, ITC Colombo One, Altair and numerous other small and large scale construction projects expected to occur in the next 5-10 years will drive growth in the construction industry with firms such as Access Engineering PLC (AEL) being at the forefront of many of these projects. The supply shortage in Colombo’s office space appears not to have diminished over the past few years, suggesting more prospects for infrastructure development in this area with necessary peripheral sectors such as parking space provision also requiring improvement. This implies consistent revenue streams for AEL as Sri Lanka transforms itself into a strategically placed knowledge services hub in South Asia Further diversification of the Access portfolio and an advent into the international arena. Access Engineering recently acquired Access Projects Pvt. Ltd, a provider of architectural and engineering solutions covering the divisions of construction, interior and ceiling structures and aluminium structure fabrication. This is an addition to the already existing subsidiaries of Access Realtors Ltd and Sathosa Motors PLC, opening up new areas for revenue growth as the group aspires to capture a larger spectrum of products and services in the construction industry. Global factors may play a key role in deciding performance for 2016. Slowing global economic growth, rapidly declining commodity and oil prices, dollar/rupee exchange rate fluctuations in the face of proposed Federal Reserve Interest Rate changes and the expected volatility in the Chinese markets as its economic structure changes are factors that will dictate the performance of construction sector firms to some extent in 2016. Declining commodity and oil prices will help the construction sector in reducing operating expenses thus expanding top and bottom- line growth, however the expected reduced influx of Foreign Direct Investments as the American Dollar strengthens may offset this growth through reduced revenue resulting from fewer investments. Hence, the Government of Sri Lanka has an integral part to play in the construction industry growth by maintaining a favourable economic environment to attract foreign and domestic investment in 2016. Note: 1. Adjusted for rights, splits, bonuses Source: Bloomberg, Candor Research Source: Bloomberg Source: Bloomberg 0 5 10 15 20 25 30 35 40 45 PRICE (LKR) TIME PERIOD AEL Share Price Fluctuation 2012-Present SUMMARY OF STATISTICS Price at evaluation (LKR) 21.90 Market capitalisation (LKR Mn) 21,600 Company as a % of total market cap. 0.79 Current Trading Range (LKR) 21.60 – 22.10 52-week high 29.90 52-week low (LKR) 18.50 Adjusted All Time High (LKR) 1 26.70 Average Daily Volume (LKR-6 months) 932,266.60 Number of shares in issue (Mn) 1000 Financial Year Ended 31 st March 120 125 130 135 140 145 150 PRICE (LKR) TIME FRAME (MONTHS) USD vs LKR Exchange Rate (2014-2015)
Transcript
ASSIGNMENT – WORK PLACEMENT CANDOR RESEARCH
Intern – Equity Research Candor Equities Limited Dulana Jayawardena Level 8, South Wing, Millennium House [email protected] 46/58, Nawam Mawatha, Colombo 2, Sri Lanka +94766071350
SRI LANKA | CONSTRUCTION | EQUITY PRICE FORECAST 25.01.2016 ACCESS ENGINEERING PLC (AEL.N000) Forecast Price Bloomberg: AEL SL EQUITY 2017/18 CSE Ticker: AEL.N000 LKR 30-33 BUY KEY HIGHLIGHTS Renewed emphasis on infrastructure as Sri Lanka aspires to position itself as a thriving international hub. The continuation of the Colombo Port City Project, property development projects such as the Shangri La project, ITC Colombo One, Altair and numerous other small and large scale construction projects expected to occur in the next 5-10 years will drive growth in the construction industry with firms such as Access Engineering PLC (AEL) being at the forefront of many of these projects. The supply shortage in Colombo’s office space appears not to have diminished over the past few years, suggesting more prospects for infrastructure development in this area with necessary peripheral sectors such as parking space provision also requiring improvement. This implies consistent revenue streams for AEL as Sri Lanka transforms itself into a strategically placed knowledge services hub in South Asia Further diversification of the Access portfolio and an advent into the international arena. Access Engineering recently acquired Access Projects Pvt. Ltd, a provider of architectural and engineering solutions covering the divisions of construction, interior and ceiling structures and aluminium structure fabrication. This is an addition to the already existing subsidiaries of Access Realtors Ltd and Sathosa Motors PLC, opening up new areas for revenue growth as the group aspires to capture a larger spectrum of products and services in the construction industry. Global factors may play a key role in deciding performance for 2016. Slowing global economic growth, rapidly declining commodity and oil prices, dollar/rupee exchange rate fluctuations in the face of proposed Federal Reserve Interest Rate changes and the expected volatility in the Chinese markets as its economic structure changes are factors that will dictate the performance of construction sector firms to some extent in 2016. Declining commodity and oil prices will help the construction sector in reducing operating expenses thus expanding top and bottom-line growth, however the expected reduced influx of Foreign Direct Investments as the American Dollar strengthens may offset this growth through reduced revenue resulting from fewer investments. Hence, the Government of Sri Lanka has an integral part to play in the construction industry growth by maintaining a favourable economic environment to attract foreign and domestic investment in 2016.
Note: 1. Adjusted for rights, splits, bonuses
Source: Bloomberg, Candor Research
Source: Bloomberg
Source: Bloomberg
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PRICE
(LKR
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TIME PERIOD
AEL Share Price Fluctuation 2012-Present
SUMMARY OF STATISTICS Price at evaluation (LKR) 21.90 Market capitalisation (LKR Mn) 21,600 Company as a % of total market cap. 0.79 Current Trading Range (LKR) 21.60 – 22.10 52-week high 29.90 52-week low (LKR) 18.50 Adjusted All Time High (LKR)1 26.70 Average Daily Volume (LKR-6 months) 932,266.60 Number of shares in issue (Mn) 1000 Financial Year Ended 31st March
Introduction Company Overview 21 years since its inception as a small scale company that catered to the niche market of providing engineering solutions such as gabion related structures, Access Engineering Ltd. (AEL) is now the largest listed construction firm on the Colombo Stock Exchange (CSE) and provides engineering and construction services in multiple areas of civil engineering. These areas include, but are not confined to, road and highway construction, water and wastewater management, Buildings and Telecommunications. AEL’s parent company, Access Group, is one of the fastest growing conglomerates of Sri Lanka and owns Access Realtors Ltd. (ARL), Access Projects Pvt. Ltd and Sathosa Motors PLC (SMOT), subsidiaries that operate in the property development, architectural solutions/aluminium structures and motors segment respectively.
In the past three years, Access has been able to secure tenders for some of the biggest civil engineering projects across Sri Lanka spanning multiple areas in the industry. AEL has completed the construction of the Southern Expressway, Mattala international airport and the Colombo-Katunayake Expressway a number of flyovers and bridges and other micro-projects and has grown to become, unquestionably, one of the largest contributors to the civil engineering sector of Sri Lanka. Industry Overview Infrastructure development appears to be a key priority for the Sri Lankan Economy in the next three to five years as the country tries to promote itself globally as a “megacity” linking South Asia with other major financial hubs such as Dubai and Singapore and AEL, being one of the biggest civil engineering firms in the country, stands to gain from these ventures. The Sri Lankan government has spoken extensively about developing the thriving services sector of the economy and aims to invest heavily towards infrastructure to support this boom, with the topic coming into focus at the recently concluded Sri Lanka Economic Forum. It is noteworthy that investment by the government and private sector into the construction sector increased to 29.7% of GDP for the year 2014/15, with the construction sector accounting for 7.9% (USD 5.7 Bn) of Sri Lanka’s USD 72 Billion GDP. The prospering tourism industry in Sri Lanka in this post-war period is also creating the need for more efficient infrastructure facilities to create better access to the rural parts of Sri Lanka in the wake of a consistent increase in tourist arrivals, with a 17.8% increase from the previous year being recorded in 2015 to take the number of tourist arrivals to 1.8 million per annum. The industry itself accounts for over USD 2 billion per annum in revenues and has seen a 19.8% increase in the last year of census.
The Northern Expressway, which is to be built from the commercial capital Colombo, towards Kandy and ultimately extended to Jaffna, is a major project on the AEL order book as Access aims to complete certain parts of the project and will likely increase revenues and drive share prices up over the course of the next three years in which the project is scheduled to occur. In addition to the Northern Expressway, the Sri Lankan government is investing into a host of other infrastructure projects in Colombo and other major cities with the Colombo Outer Circular Highway being one of the major projects that is set to take place. Construction work on the Colombo Water Front Project, Shangri – La development project, ITC Colombo One development project and Altair among others presents growing opportunities to firms such as Access, with growth in these sectors expected to continue over the next few years as Colombo transforms itself into a thriving Metropolis. Reduced investment in emerging and frontier markets in the wake of China’s economic slowdown and the strengthening of the safe haven American Dollar maybe a concern to the Sri Lankan economy and its ambitions for infrastructure development but if the government is able to stabilize the rupee and solve its balance of payments issue through correct policymaking, there is no doubt that these global effects would not be able to hamper Sri Lanka’s robust growth seen in the past decade and that there will be much more focus towards infrastructure development. Reduced prices of oil due to the ongoing trade dispute in the Persian Gulf and the decline in commodity prices amid China’s slowdown may also help AEL reduce production costs and post greater profits in the next two years. Oil prices fell to a 12 year low in early January due to oversupply, and more volatility in prices is expected throughout 2016 as Iran enters the oil supply market. The depreciating Yuan (China being Sri Lanka’s second largest importer, having a market share of 12.4% of all imports to Sri Lanka) may offset the impact of a higher American Dollar on Sri Lanka’s trade balance, allowing the Sri Lankan government to close down its trade deficit and thus allowing it to focus more spending towards infrastructure development, presenting more to firms in the construction sector. It is difficult to expect an above par performance from sectors such as the construction industry for 2016 in the wake of the slowing global economy, however it should be noted that AEL is an immediate long-term buy and in the backdrop of declining share prices expected to occur throughout 2016, it presents an opportunity for investors to buy at lower prices and hold their investments over a long term period and make significant capital gains.
Note: The financials for 2015/16E have been obtained by doubling the half yearly results obtained for that year and the projections for
2016/2017E and 2017/18E have been based on the years 2013/14, 2014/15 and 2015/16. The above model provides key financial figures for AEL from 2010/11 till 2014/15 as well as projected figures for the periods 2015/16 to 2017/18. The projected revenue growth figure for AEL has been compiled taking the company revenue growth average for the past three years. As the 2010/11 – 2012/2013 period has seen AEL as well as the industry witness exponential growth attributable primarily to the boom in infrastructure development in the post-civil-war period and is expected not to continue at the same rate in the next three years, this period was considered an outlier to AEL’s long term trend growth and hence excluded from our forecasts. A Price-to-Earnings (P/E) valuation was carried out on the relevant figures using the obtained historical data as well as the average P/E for AEL and CSE’s All Share Price Index (ASPI) over the last Five years made available through Bloomberg. Access has seen a robust revenue growth of 352% since the 2010/11 period and appears to be recovering from increasing costs of production and is expected to post a positive net profit margin of 15.1% in the period 2015/16 ending in March 2016. We expect these growth figures to continue on the backdrop of consistent investments towards infrastructure development in the next 3-5 years. Colombo has been facing a growing traffic congestion problem over the last few years due to a consistent influx of newly registered vehicles averaging 410000 units annually across Sri Lanka according to statistics by the Department of Motor Vehicles, with most of these vehicles being registered in Colombo, and policy makers are considering new methods and road network plans to solve this issue, presenting more opportunities to firms such as AEL to grow their order books.
Source: Department of Motor Vehicles
We expect AEL to maintain a YoY revenue growth of 9% from 2016 onwards for the next two years, and the forecasted net profit figures suggest a RoI of approximately 15%, making AEL a profitable long-term-buy. This is a conservative figure considering that the average industry growth over the past two years has been 17.3% (Central Bank of Sri Lanka Annual Report 2014/15) but we evaluate that AEL may not meet this average as it appears to be reaching its full scale, although the firm’s ventures into new territories such the newly acquired Access Projects Pvt. Ltd which specialises in providing architectural and engineering solutions to a broad spectrum of clients would help AEL consolidate its revenues further. AEL’s shift into the international arena, taking on projects in other emerging economies will also be a key factor for revenue growth from the 2015/16 financial year onwards. AEL’s potential for growth can be observed more prominently in three of its subsidiaries. Although the main contributor to the group’s bottom-line which is Access Engineering PLC has underperformed slightly in the first half of the 2015/2016 financial year (LKR 919 Mn versus LKR 955 Mn in 2014/2015), Access Realtors and Sathosa Motors have posted a combined net profit of LKR 229 Mn - up 17% from the previous year. This has already offset the decline in Group Net Profit, and the acquisition of Access Projects Ltd has added the contribution of a further LKR 94 Mn to the Group Bottom-line. Access Projects which is in its initial stages will have further space to grow over the next few years as Sri Lanka’s Aluminium Fabrications industry has been growing consistently in line with the sector, implying further influx of revenues for the Access Group.
Valuation and Concluding Statements Valuation This forecast was conducted using the price/earnings (P/E) ratio method. A valuation using AEL’s own P/E average over the last 5 years (9.826) as well as a valuation utilizing CSE’s All Share Price Index (ASPI) P/E average for the same period was conducted to forecast the share prices for 2015/2016, 2016/2017, 2017/2018. It should be noted that this form of valuation presents an optimistic figure of share values during bull markets, and reciprocally cuts a pessimistic figure for share values during a bear market. The world economy is facing a period of volatility that is expected to continue over the course of 2016, however we feel that AEL’s share prices should be given a bullish forecast due to the current political and economic factors pointing towards an infrastructure boom in Sri Lanka.
YEAR 2015/16 2016/17 2017/18 Projected Price (Using Company P/E) - LKR 25.23 29.10 31.72
Above displayed are the forecasts for share prices using AEL’s and ASPI’s P/E averages. AEL’s P/E ratio is currently at slightly below its long term average, making this an opportune time period to buy AEL equities and hold for an immediate-long term period.
AEL P/E Band analysis: 2014-2016
Source: Bloomberg
Source: Bloomberg
The ASPI P/E forecasts Access Engineering surging to the LKR 40-44 range by the financial year 2017/18, with the prospect of such a surge being very possible as AEL takes on new areas in the industry as the stage is set for Sri Lanka to take off towards higher economic growth. It should be also noted that the average industry P/E ratio to date is 19.82 which further reiterates the fact that AEL’s share prices are undervalued at the current value, leading us to project AEL’s share price at the LKR 30-33 range by 2018. Concluding Statements Sri Lanka presents itself as one of the leading emerging markets of the world open to foreign and domestic investment, expecting to achieve a growth rate of 6.9% (World Bank Annual Report, 2014/15) in the face of a slowing global economy. Even amid constraints from the global economy, we expect Sri Lanka’s industries to continue a healthy level of growth, with the construction industry also expected to achieve consistent progress. In the face of many infrastructure developments to take place in the next 5-10 years as Sri Lanka aspires to establish itself as a trade link to the East and West while also being endowed with its proximity the surging economy that is India. AEL which is a major contributor to the industry is expected to deliver resounding performance in this space, making this equity a very lucrative immediate-long term buy, thus we project AEL’s share price range to appreciate to LKR 30-33 by the financial year 2017/18.
