Simplex Infrastructures' Q3FY19 results (Downgrade to Underperformer) - Debt remained elevated; pace of recoveries very slow
Q3FY19 result highlights
- Simplex Infrastructures’ (Simplex) reported an overall weak quarter led by weak execution and lower than expected recoveries of overdue debtors. PAT came in at Rs362m (+16.6%yoy), below our estimate of Rs381m.
- Revenue grew by only 3.2%yoy to Rs14bn (est: Rs16.3bn) as execution remained constrained by ROW issues in certain projects & tight liquidity. EBITDA grew 6.2%yoy to Rs1.8bn, below est of Rs2bn, led by lower revenue. EBITDA margin grew 30bp yoy to 12.7% (est: 12.1%).
- Interest cost remained flat yoy at Rs1.1bn but other income declined 24.5%yoy to Rs240m on a high base.
- Gross debt remained elevated at Rs35.4bn (down Rs360m qoq) due to higher working capital levels. Simplex has recovered overdue payments of Rs3.1bn during YTDFY19 with the pace of recovery being much slower than that required to meet its original guidance of Rs7-8bn in FY19. Simplex expects to conclude the sale of its 34% stake in the Chandikhole asset in Q1FY20 leading to inflow of Rs3bn.
- Order inflow during Q3 declined 23.3%yoy to Rs13.3bn (9MFY19 inflow of Rs25bn) and Simplex has guided for inflow of Rs25bn in Q4FY19. Order backlog as of Dec-18 declined 4.8%yoy to Rs168bn (2.7x TTM revenue). The company is also L1 in projects worth Rs11bn.
- The joint auditor qualifications on long outstanding amounts have reduced from Rs15.6bn in Mar-18 to Rs5.7bn in Dec-18. Further, with regards to exposure to Abhijeet Power, out of Rs1.3bn, the company has written off Rs1bn (Rs295m of inventory still remains).
Key positives: Strong order backlog and improved margins.
Key negatives: Slower than guided recoveries of old debtors.
Impact on financials: Downgrade in FY20E earnings by 27.6% as we have sharply lowered our execution growth due to elevated debt levels.
Valuations & view
Simplex’s current order backlog of Rs168bn (ex of L1 orders of Rs11bn) provides strong growth visibility over the next 2-3 years. However, working capital cycle continues to remain stretched and with lower than anticipated recoveries (Rs3.1bn YTDFY19 against original annual target of Rs7-8bn) execution remains constrained. Working capital cycle even on incremental execution remains elevated diminishing hope of a sustainable reduction in debt and rebound in execution. We value Simplex’s EPC business at 5.2x FY20E EBITDA (~15% lower than our previous multiple due to execution uncertainty) and the Bhubaneswar- Chandikhole asset at the transaction value of Rs3bn as indicated by the company. Accordingly we have a price target of Rs155 for the stock and downgrade our recommendation to Underperformer.
Simplex Infrastructures Limited is engaged in the business of contract constructing infrastructural facilities. The Company's segments include Construction business and Others. The Others segment includes oil drilling services, real estate, and hire of plant and equipment. The Company is engaged in building rail infrastructure, including rail tracks, station buildings, bridges and culverts; marine structures, including ports and bridges; design and construction of high-rise infrastructure, including multistoried residential towers, institutional or information technology buildings, hotels, hospitals and mass housing projects; construction of power infrastructures, such as thermal, hydel and nuclear, as well as ultra-mega power projects (UMPP), and renovation and modernization of airports. The Company offers projects for cement, aluminum, copper, engineering, automobiles, petrochemicals, fertilizers, paper textiles, pharmaceuticals, chemicals and other industrial plants.
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