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JKSB Quarterly Highlights_Access Engineering PLC (AEL)_2QFY17

AEL reported a moderate 5% YoY increase in Group earnings for 2QFY17, with healthy topline growth (+15% YoY) being partially offset by 1) increased admin expenses (mainly stemming from a rise in selling & distribution and admin costs relating to subsidiary Sathosa Motors); and 2) sharply higher finance costs (primarily attributable to a steep increase in short term borrowings for 80% owned subsidiary Access Projects and interest expense stemming from the Group’s FY16 debenture issue). As expected, margins for the core construction business have improved strongly (operating margin +9ppt YoY for the quarter), due to contribution from a short duration high margin water supply project, coupled with a number of new piling projects. AEL’s confirmed order book (based on ongoing projects over the next 1.5-2.0 years) amounted to ~Rs. 30bn-Rs. 31bn as at November 2016 (up from Rs. 27bn in June 2016).

While 1HFY17 earnings are down 3% YoY due to a weak first quarter (please refer to our last earnings review dated August 2016 for further details), AEL is well on track to hit our full year earnings projection of Rs. 2.46bn (-0.4% YoY). At its current price of Rs. 26.20, AEL trades at a FY17E P/E of 10.7x, in-line with our coverage universe and at a discount to the construction sector average P/E. Our channel checks suggest a strong pipeline for AEL from FY18 onwards. While there has been no visibility on the award of construction work on the Central Expressway, we expect one stretch of the expressway (amounting to ~Rs. 120bn) to be awarded to a shortlisted group of twelve qualified local contractors. We also see opportunities for AEL to further grow its order book in the higher margin water and irrigation sectors, with a potential pipeline of >Rs. 10bn. We have, however, only factored in confirmed orders into our earnings projections.