ICRA Lanka reaffirms the ratings of Access Engineering PLC
|Instrument*||Rated Amount (LKR Mn)||Outstanding Amount|
|Issuer Rating||N/A||N/A||[SL] A+ with Negative Outlook; Reaffirmed|
|Senior Unsecured Redeemable Listed Debenture programme||5,000.00||1.59||[SL] A+ with Negative Outlook; Reaffirmed|
|Senior Unsecured Redeemable Listed Debenture programme||5,000.00||4,998.41||[SL] A+ with Negative Outlook; Withdrawn|
ICRA Lanka Limited has reaffirmed the issuer rating of [SL]A+ (pronounced S L A plus) with Negative 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 Negative outlook for the Company’s outstanding LKR 1.59 Mn Senior Unsecured Redeemable Listed Debenture Programme. At the request of the Company, ICRA Lanka has withdrawn the rating for the matured amount of LKR 4,998.41 Mn of the Senior Unsecured Redeemable Listed Debenture programme.
ICRA Lanka takes a consolidated view of the Access Engineering PLC and its group entities, given the significant operational and financial linkages.
The rating reaffirmations consider the increasing revenue diversity, healthy order book position and favourable industry outlook post the Covid-19 Pandemic. AEL (Consolidated level) operates mainly in four sectors i.e. Civil Engineering, Construction Material Sales, Commercial Real-Estate, and Automobile Dealership. For the FY2021, Civil Engineering segment contributed approximately 54% of AEL’s revenues, followed by the Construction Materials segment (27%), the Automobile segment (16%), and the Commercial Real Estate segment (3%). AEL has further diversified its revenue base by expanding into material supply to construction segment in FY2021, in addition to the commercial real estate segment. The Company has made significant investments in the construction material segment, envisaging the demand for asphalt in the medium term. The demand will be driven by the resurfacing of 100,000 KM rural roads under the i-Road project and Central and Ruwanpura expressway projects. AEL reported a healthy and diversified order book that provides strong revenue visibility in the medium term. The demand prospects for Sri Lanka’s construction industry remain favourable, post the Pandemic. AEL being a leading construction company in Sri Lanka is expected to benefit further from new large-scale development projects in the medium term.
The ratings also consider 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, and foundations & sub-ground work for high-rise buildings. Further, AEL also has varied experience undertaking EPC works in engineering segments such as water infrastructure, telecommunications, ports, airports, etc. Further, the ratings also consider the Company’s professional management team, the healthy relationships with various stakeholders in the construction industry, and the reputation in the industry for technology innovation and timely delivery.
The Negative outlook reflects the expected increase in debt levels and moderation in the capital structure and debt servicing indicators in the near term due to increased working capital intensity on account of high inventory holding and receivables. The pressure on the capital structure would ease out after the company receives LKR 2.7 Bn payment from the Bloemendhal Housing project which would be due in FY2023. The ability of the Company to realize the payment on time from the Urban Development Authority of Sri Lanka and reduction in debt levels would be a key monitorable.
Key Rating Drivers
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. The Company also has its 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.
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, which have guided the Company through several business cycles. The Company has a relatively well-planned succession management policies and 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 manage its operational challenges much faster than other competitors successfully.
Healthy order book position: The Company has a healthy order book of LKR 50.9 in Jun-21 Bn compared to LKR LKR 48.6 Bn in Jun-20 and LKR 33.7 Bn in Jun-19. In FY2022, i-Road project, Nittambuwa Pasyala road development project, Elliot Place Housing project, Bandaranaike International Airport (BIA) and Stadiumgama housing projects will be the significant contributors to the construction segment’s revenue. The demand prospects for Sri Lanka’s construction industry remain favourable post the Pandemic. AEL, a leading construction company in Sri Lanka, is expected to benefit further from new large-scale development projects in the short term. If the bids are successful, the Company’s financial profile would significantly benefit from the same. The ability of the Management to successfully manage the ongoing construction project risks, while growing the revenue contribution in the new normal will remain to be reviewed going forward.
Increasing revenue diversity: AEL has diversified its revenue base by expanding into the construction material segment in addition to the commercial real estate segment. The construction material segment’s contribution increased to 36% in Q1FY2022 from 27% in FY2021 and 13% in FY2020. As a result, the segment reported a Y-o-Y growth of 108% in FY2021 and annualised growth of 62% in Q1FY2022. The revenue growth of the segment was driven by supplying asphalt to road construction projects. The Company foresees strong growth for asphalt in the next two to three years due to ADB funded i-Road project (resurfacing 100,000 Km of rural roads) and expressway projects (Central and Ruwanpura). In line with the envisaged growth, the Company has invested in asphalt plants during FY2021 and Q1FY2022. The Company has also invested in several real-estate projects. Blue Star Realties (Pvt) Ltd, a real-estate project, is expected to be completed by end of the FY2022. 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). Currently, this project has recorded ~45% bookings. In the medium term, Harbor Village Project is expected to contribute significantly towards the overall profitability of the Group. The revenue from the property segment declined by 17% in FY2021 due to concessions offered to the tenants of Access Towers amidst the Pandemic. Occupancy rate is 97% and 95% in Access Tower I and II respectively as of Sep-21. The Company has commenced work on the Access Tower III-Car Park project in Jun-21, and it will get completed in two years. Once completed, this will add 285 parking spaces to Access Towers. During FY2020/21, the Company invested in a warehousing facility through a fully owned subsidiary, W U S Logistics (Pvt) Ltd. The total cost of this project is ~LKR 5.7 Bn and was fully funded at the standalone level. This warehouse facility will be rented out to Camso-Loadstar with a “lock-in period” of ten years. ICRA Lanka will continue to monitor the performance of the construction material segment and the progress of these large-scale projects (including the Harbour Village project) while managing the project-related risks.
Revenue and profitability; The Consolidated entity reported Y-0-Y revenue growth of -0.8% in FY2021 compared to -25.6% in FY2020 and 23.9% in FY2019. Revenue drop in automobile and construction segments were the main contributors to the modest performance. The automobile segment was affected by the ban on import of motor vehicles since FY2020. The Group’s construction segment has also been negatively affected by the supply chain and labour force disruptions due to COVID-19 Pandamic related lockdowns since Apr-20. The Group’s profit margin remained volatile as it improved to 15.3% in FY2021 compared to 13.0% in FY2020, with the improved contribution from the construction material segment. In Q1FY2022, the OPM reduced to 14.1% due to significant slowdown in road construction projects due to the pandemic and land acquisition issues. The ability to maintain healthy profitability indicators consistently in the consolidated entity in the medium term would be a key monitorable.
Capital structure and debt coverage; The Company’s borrowings increased to LKR 12.1 Bn in Jun-21 from 9.3 Bn in Mar-21 and LKR 11.5 Bn in Mar-20. The borrowings increased due to the working capital required to expand the construction material segment. This has exerted pressure on the Capital structure and debt service indicators during the latest quarter ending Jun-21. Total Operating Liabilities to Total Networth (TOL/TNW) ratio of the consolidated entity has increased to 1.28x in Jun-21 from 1.14x in Mar-21 and 1.07x in Mar-20. The Total Debt to OPBITDA ratio increased to 3.04x in Q1FY2022 from 2.52x in FY2021. The same was 3.61x in FY2020. The gearing ratio increased to 0.47x in Q1FY2022 from 0.36x in FY2021. The same was 0.48x in FY2020. Given the expected completion of a working capital intensive project by end of FY2022, the Company is expected to receive ~LKR 2.7 Bn trade receivables from Government authorities over the next six months. This will partly ease the pressure on the capital structure in the short term. AEL’s ability to realise the payment on time would be a key monitorable. Moreover, debt coverage ratios of the consolidated entity moderated in Q1FY2022 as the Net Cash Accruals to Total Debt ratio stood at 21% compared to 27% in FY2021 and 14% in FY2020. DSCR ratio of the consolidated entity continued to remain moderate as compared to pre-FY2020 level as the same stood at 2.25x in Q1FY2022 compared to 0.76x in FY2021 and 2.37x in FY2020. The DSCR ratio reduced to 0.76x in FY2021 due to maturity of the LKR 4.9 Bn debentures in Nov-20. The same was settled by the Company using term loans. ICRA Lanka draws comfort from the Company’s current liquid investments/cash position and the Company’s access to larger undrawn sanctioned lines. This would help the Company service/repay any larger capital repayment in the medium term. However, in the future, any significantly larger capital commitments (than previously envisaged) would pressure the Company’s overall liquidity position.
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/corporate-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 real-estate segment in Sri Lanka with its first mixed development project-Marina Square, Colombo with 1,088 units and 1.3 Mn sq. ft of sellable area. The Company owns a 60% joint venture stake in Capital Heights Rajagiriya through Blue Star Realties (Pvt) Ltd. The Capital Heights has 242 units and 0.4 Mn sq.ft sellable area. In 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.
Key financial indicators (audited) – Consolidated
|Figs are in LKR Mn||FY17||FY18||FY19||FY20||FY21||1QFY22*|
|OPBDITA/Interest & Finance Charges||5.6||3.5||3.1||2.2||3.3||5.8|
|NCA/Total Debt (%)||35.52||13.68||32.07||14.37||26.73||21.38|
|Total Debt/OPBDITA (times)||1.47||3.00||1.93||3.61||2.52||3.04|
Note; Gearing-(Total Debts/ Networth),*-Unaudited
Rating history for last three years
|Dasith Fernando |
Subsidiary of ICRA Limited
A Group Company of Moody's Investors Service
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