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Access Engineering Sri Lanka [SL]A+ rating confirmed, outlook lowered: ICRA

ECONOMYNEXT – ICRA Lanka said it was confirming a [SL]A+ rating of Sri Lanka’s Access Engineering Plc has been confirmed on it track record and order book but was cutting its outlook to ‘negative’ or higher debt and lower profits on the impact of Coronavirus.

“The revision of the rating outlook from Stable to Negative is on account of increased debt levels and the moderation of the debt service indicators of the Company during FY2020 and Q1FY2021,” ICRA said.

“..ICRA Lanka takes comfort in AEL’s healthy order book position with diversified ongoing construction contracts/projects.

“The ratings also factor in the moderation in the Company’s profitability metrics and debt service indicators during FY2020 and Q1FY2021 amidst the exceptional events that took place during this period.

The full statement is reproduced below:

ICRA Lanka reaffirms the ratings of Access Engineering PLC Revises the Outlook from Stable to Negative
October 12, 2020

Rating action

ICRA Lanka Limited has reaffirmed the issuer rating of Access Engineering PLC (“AEL”/ “the Company”) at [SL]A+ (pronounced S L A plus[1]) while revising the outlook from Stable to Negative. ICRA Lanka has also reaffirmed the issue Rating of [SL]A+(pronounced S L A plus) assigned to the Company’s Senior Unsecured Redeemable Listed Debenture Programme, amounting to LKR 5,000 Mn while revising the outlook from Stable to Negative.

Rationale

The revision of the rating outlook from Stable to Negative is on account of increased debt levels and the moderation of the debt service indicators of the Company during FY2020 and Q1FY2021.

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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 FYE2020, Civil engineering segment contributed approximately 66% of AEL’s revenues, while the automobile dealership segment contributed~17%, construction materials segment contributed~ 13% and the remaining ~4% 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, 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 moderation in the Company’s profitability metrics and debt service indicators during FY2020 and Q1FY2021 amidst the exceptional events that took place during this period.

The Company’s OPBDITA margins have moderated from 17.1% in FY19 to 13.1% and 11.4% in FY20 and Q1FY21 respectively. During this period, the Company’s debt levels have also further increased owing to the stretched trade receivables and new investments undertaken in new business diversifications.

This has exerted some pressure on the Company’s capitalization metric during this period. The Company’s gearing level moderated to 0.40(x) as of March 31, 2020 from 0.30(x) as of March 2019. Given the completion of most key construction projects during FY2020, the Company expects ~LKR 3.5 Bn payment of trade receivables from Government authorities over the next two months.

ICRA Lanka draws comfort from the Company’s current liquid investments/cash position as well as the Company’s access to larger undrawn sanctioned lines. This would in turn help the Company to service/repay its larger debenture-repayment commitments that will fall due in FY2021.

However, going forward, any larger capital commitments (than previously envisaged) towards real-estate subsidiaries/new investments in the warehousing project, would exert some pressure on the overall liquidity position of the Company, notwithstanding the larger unutilized funding facilities, which are already in place to finance the same.

Outlook: Negative

The Negative outlook reflects the moderation in the Company’s capital structure and the coverage indicators in FY2020 and Q1FY2021 amidst the exceptional events that took place during this period.

Key Rating Drivers

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 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 the 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 has been affected negatively during FY2020 and Q1FY2021 due to exceptional events that took place during this period, the Company has been able to secure relatively larger number of construction contracts during this period. This was further witnessed by the current order book position of~ LKR 48 Bn as compared with LKR 43 Bn, in the previous year. 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 new larger scale development projects in the medium/long term. The construction of the central express way project (section-02) was a major infrastructure project of the Company over the last two years. This project is currently in the handing over phase. Recently, the Company has been able to secure new construction projects, which are collectively valued at~ LKR 15 Bn. Therefore, the ability of the management to successfully manage the ongoing construction project-risks while growing the revenue contribution in the post COVID-19 Pandemic, will remain to be reviewed going forward.

Diversification into the real-estate segment: 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 3.0 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).

Currently, this project has recorded ~35% of presales. Going forward, Harbor Village Project is expected to contribute significantly towards the overall profitability of the Group. The financial performance of Access Realties has improved noticeably during FY2020, following the increased revenue/other income contribution from Access Tower-II, which was fully occupied in FY2019/20.

During FY2020, the Company has invested in a new warehousing facility through a fully owned subsidiary, W U S Logistics (Pvt) Ltd. The total cost of this project is ~LKR 5.0 Bn and is expected to be fully funded at the standalone level. This warehouse facility is to be rented out for Camso-Loadstar in early CY2021 with “lock in period” of ten years. Going forward, ICRA Lanka will continue to monitor the progress of these large scale projects (including Harbour Village project) and the ability of the management to successfully implement the key stages of these investments as envisaged, while managing the project-related risks.

Profitable Operation: The Access Engineering Group has maintained healthy profitability margins in the past. However, the Group revenue has declined sharply during FY2020 and Q1FY2021 amidst the exceptional events that took place during this period. During this period, the Group’s construction segment has also been negatively affected amidst the temporary ban on materials used for the production plants in the aftermath of the Easter Sunday attack and the lockdowns in the post COVID-19 Pandemic.

This together with some operational expenditures incurred for the real-estate projects have affected the Group’s operating profit margins during this period. The Group has recorded a PAT of LKR 927.6 Mn in FY2020 as against LKR 2,245.4 Mn in the previous year.

Credit challenges

Moderation in Group’s capital structure; the gearing levels of the Group has moderated from 0.39(x) in FY2019 to 0.48(x) and 0.45(x) in FY2020 and Q1FY2021 respectively. However, AEL had sizable cash and short term liquid investments of ~ LKR 5.0 Bn in FY2020 (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 3.05 Bn in FYE2020 (which is largely from Sathosa Motors PLC).

Access Projects and Sathosa Motors have well-established operations with positive operational cash flows and adequate debt servicing ability and hence no financial support is generally anticipated towards these businesses.

However, during past two years, overall performance of Sathosa Motors has been affected due to the import-restriction regulations as well as weaker macro-economic conditions that prevailed during this period. This has largely affected the overall debt levels of the Access Engineering Group during this period.

Increasing working capital intensity: During FY2020 and Q1FY2021, the Company’s working capital intensity has further increased on account of increased debtors and inventory levels. The increased trade receivables are largely attributable to the completion of key construction projects in addition to the ongoing working capital intensive projects.

During FY2021, the Company has been able to secure/start another working capital intensive UDA housing development project at Stadiumgama, amounting to ~LKR 6.0 Bn. Therefore, ICRA Lanka forecasts a higher working capital intensity for the Access Engineering Group going forward, considering these projects (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 5.0 Bn (at consolidated level) in Q1FY2021.

Increased competition and negative industry/economic outlook; During CY2019, the overall construction sector in Sri Lanka has grown by~4.0%, compared to 2.5% contraction in the previous year.

This is largely attributable to the accelerated completion of large-scale construction projects (such as the extension of the Southern Expressway Project) during the latter part of CY2019. However, most construction projects undertaken by the local contractors have experienced a slowdown amidst the Easter Sunday attacks that took place during this period.

The construction industry in Sri Lanka has once again been affected in March 2020 owing to the spread of COVID-19 Pandemic. During this period, notwithstanding the healthy order book position of the Company, AEL’s performance was affected to an extent due to lockdowns in the post COVID-19 Pandemic.

The Company’s key construction projects have experienced some delays due to labour deployment issues and other health related compliances in the post COVID -19 Pandemic.

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 will 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.

Analytical approach: For arriving at the ratings, ICRA Lanka has applied its rating methodologies as indicated below.
Links to applicable criteria:https://www.icralanka.com/issuer-rating-methodology/

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, including AEL and its subsidiaries.

Over the last 20 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 (CSE) 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 business segments. In February 2012, Access Engineering acquired Sathosa Motors PLC (Sathosa), which holds the franchise for Isuzu commercial vehicles. Also, Sathosa’s subsidiary –Access Motors (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 segment in Sri Lanka with its first mixed development project-Marina Square, Colombo with 1,068 units and 150,000 sq. ft of commercial space facilities. During FY2020, the Company has set up a fully owned subsidiary, W U S Logistics (Pvt) Ltd to operate a larger scale warehousing facility in Sri Lanka.