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JKSB: Quarterly Highlights: Access Engineering PLC (AEL): 2QFY18

AEL reported a steep 57% YoY decline in Group earnings for 2QFY18, with strong topline growth (+29% YoY) being primarily offset by sharp operating margin contraction for the core construction business (-19ppt YoY to 7%), which was impacted by 1) increases in materials costs (steel, sand etc) 2) subcontractor costs; 3) increased revenue recognition on Access Towers 2 during the quarter, which was lower margin due to being an inter-Group project; and 4) a loss recognition on Access Projects stemming from cost overruns. Revenue growth was, however, strong for the construction business during the quarter (+27% YoY), with revenue recognition led by the building, bridges & flyover and roads & highway sectors. The constructions materials business saw marginal topline growth (+1% YoY) during the quarter, while a shrinkage in operating margin (-8ppt YoY to 12%) was due to 1) pre-operational expenses related to AEL’s new concrete batching plant; and 2) increased price competitiveness in the industry. Subsidiary Sathosa Motors PLC continued to perform strongly, with revenues +43% YoY - on the back of strong demand for its range of ‘Isuzu’ branded light commercial trucks which hold an estimated 60%-70% market share - and operating margin +2ppt YoY to 9%. AEL’s confirmed order book amounted to ~Rs. 38bn as at end September 2017 (including work already awarded on the Central Expressway).

 We continue to see AEL as a Long Term Buy, given a strong longer term pipeline of projects, but we expect bottom line performance to be weaker over FY18-FY19 and have downgraded our earnings forecasts accordingly. With 1HFY18 earnings at Rs. 899mn, and given expectations of higher material prices continuing into 2HFY18, we now project full year earnings of Rs. 1.98bn (-27% YoY) for FY18E. AEL’s core construction business will continue to enjoy its current concessionary tax rate of 12% in FY18, but will be subject to a 28% income tax rate from FY19 onwards. At its current price of Rs. 25.00, AEL trades at a FY18E P/E of 12.6x, at a premium to our coverage universe P/E for FY18E.