The document provides an equity price forecast for Access Engineering PLC, a large Sri Lankan construction firm, predicting share prices of LKR 30-33 over the next two years based on continued infrastructure development in Sri Lanka. Key projects driving growth include the Northern Expressway, Colombo Outer Circular Highway, and Colombo Port City. Global factors like slowing growth and declining oil prices may impact performance but reduced costs and a stable rupee could offset negatives. Valuation using historical P/E ratios suggests the share price will reach LKR 30-33, supporting a "Buy" recommendation.

1. ASSIGNMENT – WORK PLACEMENT CANDOR RESEARCH
Intern – Equity Research Candor Equities Limited
Dulana Jayawardena Level 8, South Wing, Millennium House
dulana.jayawardena@candorh.com 46/58, Nawam Mawatha, Colombo 2, Sri Lanka
+94766071350
SRI LANKA | CONSTRUCTION | EQUITY PRICE FORECAST 25.01.2016
ACCESS ENGINEERING PLC (AEL.N000) Forecast Price
Bloomberg: AEL SL EQUITY 2017/18
CSE Ticker: AEL.N000
LKR 30-33
BUY
KEY HIGHLIGHTS
Renewed emphasis on infrastructure as Sri Lanka
aspires to position itself as a thriving international
hub.
The continuation of the Colombo Port City Project, property
development projects such as the Shangri La project, ITC
Colombo One, Altair and numerous other small and large
scale construction projects expected to occur in the next 5-10
years will drive growth in the construction industry with firms
such as Access Engineering PLC (AEL) being at the forefront
of many of these projects. The supply shortage in Colombo’s
office space appears not to have diminished over the past few
years, suggesting more prospects for infrastructure
development in this area with necessary peripheral sectors
such as parking space provision also requiring improvement.
This implies consistent revenue streams for AEL as Sri Lanka
transforms itself into a strategically placed knowledge services
hub in South Asia
Further diversification of the Access portfolio and
an advent into the international arena.
Access Engineering recently acquired Access Projects Pvt.
Ltd, a provider of architectural and engineering solutions
covering the divisions of construction, interior and ceiling
structures and aluminium structure fabrication. This is an
addition to the already existing subsidiaries of Access
Realtors Ltd and Sathosa Motors PLC, opening up new areas
for revenue growth as the group aspires to capture a larger
spectrum of products and services in the construction
industry.
Global factors may play a key role in deciding
performance for 2016.
Slowing global economic growth, rapidly declining commodity
and oil prices, dollar/rupee exchange rate fluctuations in the
face of proposed Federal Reserve Interest Rate changes and
the expected volatility in the Chinese markets as its economic
structure changes are factors that will dictate the performance
of construction sector firms to some extent in 2016. Declining
commodity and oil prices will help the construction sector in
reducing operating expenses thus expanding top and bottom-
line growth, however the expected reduced influx of Foreign
Direct Investments as the American Dollar strengthens may
offset this growth through reduced revenue resulting from
fewer investments. Hence, the Government of Sri Lanka has
an integral part to play in the construction industry growth by
maintaining a favourable economic environment to attract
foreign and domestic investment in 2016.
Note: 1. Adjusted for rights, splits, bonuses
Source: Bloomberg, Candor Research
Source: Bloomberg
Source: Bloomberg
0
5
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15
20
25
30
35
40
45
PRICE(LKR)
TIME PERIOD
AEL Share Price Fluctuation 2012-Present
SUMMARY OF STATISTICS
Price at evaluation (LKR) 21.90
Market capitalisation (LKR Mn) 21,600
Company as a % of total market cap. 0.79
Current Trading Range (LKR) 21.60 – 22.10
52-week high 29.90
52-week low (LKR) 18.50
Adjusted All Time High (LKR)1
26.70
Average Daily Volume (LKR-6 months) 932,266.60
Number of shares in issue (Mn) 1000
Financial Year Ended 31st
March
120
125
130
135
140
145
150
PRICE(LKR)
TIME FRAME (MONTHS)
USD vs LKR Exchange Rate (2014-2015)

2. ACCESS ENGINEERING PLC. EQUITY PRICE FORECAST
© 2015 Candor Research
Introduction
Company Overview
21 years since its inception as a small scale company that
catered to the niche market of providing engineering solutions
such as gabion related structures, Access Engineering Ltd.
(AEL) is now the largest listed construction firm on the
Colombo Stock Exchange (CSE) and provides engineering
and construction services in multiple areas of civil
engineering. These areas include, but are not confined to,
road and highway construction, water and wastewater
management, Buildings and Telecommunications. AEL’s
parent company, Access Group, is one of the fastest growing
conglomerates of Sri Lanka and owns Access Realtors Ltd.
(ARL), Access Projects Pvt. Ltd and Sathosa Motors PLC
(SMOT), subsidiaries that operate in the property
development, architectural solutions/aluminium structures
and motors segment respectively.
In the past three years, Access has been able to secure
tenders for some of the biggest civil engineering projects
across Sri Lanka spanning multiple areas in the industry. AEL
has completed the construction of the Southern Expressway,
Mattala international airport and the Colombo-Katunayake
Expressway a number of flyovers and bridges and other
micro-projects and has grown to become, unquestionably, one
of the largest contributors to the civil engineering sector of Sri
Lanka.
Industry Overview
Infrastructure development appears to be a key priority for the
Sri Lankan Economy in the next three to five years as the
country tries to promote itself globally as a “megacity” linking
South Asia with other major financial hubs such as Dubai and
Singapore and AEL, being one of the biggest civil engineering
firms in the country, stands to gain from these ventures. The
Sri Lankan government has spoken extensively about
developing the thriving services sector of the economy and
aims to invest heavily towards infrastructure to support this
boom, with the topic coming into focus at the recently
concluded Sri Lanka Economic Forum.
It is noteworthy that investment by the government and private
sector into the construction sector increased to 29.7% of GDP
for the year 2014/15, with the construction sector accounting
for 7.9% (USD 5.7 Bn) of Sri Lanka’s USD 72 Billion GDP. The
prospering tourism industry in Sri Lanka in this post-war period
is also creating the need for more efficient infrastructure
facilities to create better access to the rural parts of Sri Lanka
in the wake of a consistent increase in tourist arrivals, with a
17.8% increase from the previous year being recorded in 2015
to take the number of tourist arrivals to 1.8 million per annum.
The industry itself accounts for over USD 2 billion per annum
in revenues and has seen a 19.8% increase in the last year of
census.
The Northern Expressway, which is to be built from the
commercial capital Colombo, towards Kandy and ultimately
extended to Jaffna, is a major project on the AEL order book
as Access aims to complete certain parts of the project and
will likely increase revenues and drive share prices up over
the course of the next three years in which the project is
scheduled to occur.
In addition to the Northern Expressway, the Sri Lankan
government is investing into a host of other infrastructure
projects in Colombo and other major cities with the Colombo
Outer Circular Highway being one of the major projects that is
set to take place. Construction work on the Colombo Water
Front Project, Shangri – La development project, ITC
Colombo One development project and Altair among others
presents growing opportunities to firms such as Access, with
growth in these sectors expected to continue over the next few
years as Colombo transforms itself into a thriving Metropolis.
Reduced investment in emerging and frontier markets in the
wake of China’s economic slowdown and the strengthening of
the safe haven American Dollar maybe a concern to the Sri
Lankan economy and its ambitions for infrastructure
development but if the government is able to stabilize the
rupee and solve its balance of payments issue through correct
policymaking, there is no doubt that these global effects would
not be able to hamper Sri Lanka’s robust growth seen in the
past decade and that there will be much more focus towards
infrastructure development.
Reduced prices of oil due to the ongoing trade dispute in the
Persian Gulf and the decline in commodity prices amid
China’s slowdown may also help AEL reduce production costs
and post greater profits in the next two years. Oil prices fell to
a 12 year low in early January due to oversupply, and more
volatility in prices is expected throughout 2016 as Iran enters
the oil supply market. The depreciating Yuan (China being Sri
Lanka’s second largest importer, having a market share of
12.4% of all imports to Sri Lanka) may offset the impact of a
higher American Dollar on Sri Lanka’s trade balance, allowing
the Sri Lankan government to close down its trade deficit and
thus allowing it to focus more spending towards infrastructure
development, presenting more to firms in the construction
sector.
It is difficult to expect an above par performance from sectors
such as the construction industry for 2016 in the wake of the
slowing global economy, however it should be noted that AEL
is an immediate long-term buy and in the backdrop of declining
share prices expected to occur throughout 2016, it presents
an opportunity for investors to buy at lower prices and hold
their investments over a long term period and make significant
capital gains.
Source: Bloomberg
0
20
40
60
80
100
120
140
PRICEPERUNIT(USD)
TIME PERIOD
Daily US Brent Crude Oil Prices 2013-2016
ACCESS GROUP
ACCESS
ENGINEERING
PLC.
ACCESS
REALTORS LTD.
SATHOSA
MOTORS LTD.
ACCESS
PROJECTS LTD
Group Organisational Structure.

3. ACCESS ENGINEERING PLC. EQUITY PRICE FORECAST
© 2015 Candor Research
Historical Data and Forecasts.
Note: The financials for 2015/16E have been obtained by doubling the half yearly results obtained for that year and the projections for
2016/2017E and 2017/18E have been based on the years 2013/14, 2014/15 and 2015/16.
The above model provides key financial figures for AEL from
2010/11 till 2014/15 as well as projected figures for the periods
2015/16 to 2017/18. The projected revenue growth figure for
AEL has been compiled taking the company revenue growth
average for the past three years. As the 2010/11 – 2012/2013
period has seen AEL as well as the industry witness
exponential growth attributable primarily to the boom in
infrastructure development in the post-civil-war period and is
expected not to continue at the same rate in the next three
years, this period was considered an outlier to AEL’s long term
trend growth and hence excluded from our forecasts. A Price-
to-Earnings (P/E) valuation was carried out on the relevant
figures using the obtained historical data as well as the
average P/E for AEL and CSE’s All Share Price Index (ASPI)
over the last Five years made available through Bloomberg.
Access has seen a robust revenue growth of 352% since the
2010/11 period and appears to be recovering from increasing
costs of production and is expected to post a positive net profit
margin of 15.1% in the period 2015/16 ending in March 2016.
We expect these growth figures to continue on the backdrop
of consistent investments towards infrastructure development
in the next 3-5 years. Colombo has been facing a growing
traffic congestion problem over the last few years due to a
consistent influx of newly registered vehicles averaging
410000 units annually across Sri Lanka according to statistics
by the Department of Motor Vehicles, with most of these
vehicles being registered in Colombo, and policy makers are
considering new methods and road network plans to solve this
issue, presenting more opportunities to firms such as AEL to
grow their order books.
Source: Department of Motor Vehicles
We expect AEL to maintain a YoY revenue growth of 9% from
2016 onwards for the next two years, and the forecasted net
profit figures suggest a RoI of approximately 15%, making
AEL a profitable long-term-buy. This is a conservative figure
considering that the average industry growth over the past two
years has been 17.3% (Central Bank of Sri Lanka Annual
Report 2014/15) but we evaluate that AEL may not meet this
average as it appears to be reaching its full scale, although
the firm’s ventures into new territories such the newly acquired
Access Projects Pvt. Ltd which specialises in providing
architectural and engineering solutions to a broad spectrum of
clients would help AEL consolidate its revenues further. AEL’s
shift into the international arena, taking on projects in other
emerging economies will also be a key factor for revenue
growth from the 2015/16 financial year onwards.
AEL’s potential for growth can be observed more prominently
in three of its subsidiaries. Although the main contributor to the
group’s bottom-line which is Access Engineering PLC has
underperformed slightly in the first half of the 2015/2016
financial year (LKR 919 Mn versus LKR 955 Mn in 2014/2015),
Access Realtors and Sathosa Motors have posted a combined
net profit of LKR 229 Mn - up 17% from the previous year. This
has already offset the decline in Group Net Profit, and the
acquisition of Access Projects Ltd has added the contribution
of a further LKR 94 Mn to the Group Bottom-line.
Access Projects which is in its initial stages will have further
space to grow over the next few years as Sri Lanka’s
Aluminium Fabrications industry has been growing
consistently in line with the sector, implying further influx of
revenues for the Access Group.
Year 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16E 2016/17E 2017/18E
Revenue (LKR Mn) 3,651 7,320 13,900 16,373 16,514 17,715 19,309 21,047
Growth (Revenue) 100.5% 89.9% 17.8% 0.9% 7.3% 9.0% 9.0%
Cost of Sales (LKR Mn) 2,355 5,199 10,839 12,187 12,699 13,752 14,737 16,063
Growth Rate for costs 120.8% 108.5% 12.4% 4.2% 8.3% 7.2% 9.0%
Gross Profit (LKR Mn) 1,296 2,121 3,061 4,186 3,815 3,962 4,572 4,984
Gross Profit Margin 35.5% 29.0% 22.0% 25.6% 23.1% 22.4% 23.7% 23.7%
Profit After Tax (LKR Mn) 1,167 1,737 2,412 2,902 2,424 2,682 3,060 3,336
Profit After Tax Margin 32.0% 23.7% 17.4% 17.7% 14.7% 15.1% 15.8% 15.8%
Profit After Tax Growth Rate 48.8% 38.9% 20.3% -16.5% 10.7% 14.1% 9.0%
Profit Attributable to Owners (LKR Mn) 962 1,733 2,376 2,833 2,346 2,568 2,961 3,228
Net Profit Margin 26.3% 23.7% 17.1% 17.3% 14.2% 14.5% 15.3% 15.3%
Net Profit Growth Rate 80.1% 37.1% 19.2% -17.2% 9.5% 15.3% 9.0%
No of Shares (Mn) 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
ACCESS ENGINEERING PLC.
359213
525421
397295
326651
429566
0
100000
200000
300000
400000
500000
600000
2010 2011 2012 2013 2014
NUMBEROFVEHICLES
YEAR OF REGISTRATION
New Vehicle Registrations 2010-2014

4. ACCESS ENGINEERING PLC. EQUITY PRICE FORECAST
© 2015 Candor Research
Valuation and Concluding Statements
Valuation
This forecast was conducted using the price/earnings (P/E)
ratio method. A valuation using AEL’s own P/E average over
the last 5 years (9.826) as well as a valuation utilizing CSE’s
All Share Price Index (ASPI) P/E average for the same period
was conducted to forecast the share prices for 2015/2016,
2016/2017, 2017/2018. It should be noted that this form of
valuation presents an optimistic figure of share values during
bull markets, and reciprocally cuts a pessimistic figure for
share values during a bear market. The world economy is
facing a period of volatility that is expected to continue over
the course of 2016, however we feel that AEL’s share prices
should be given a bullish forecast due to the current political
and economic factors pointing towards an infrastructure boom
in Sri Lanka.
YEAR 2015/16 2016/17 2017/18
Projected Price (Using
Company P/E) - LKR
25.23 29.10 31.72
Projected Price (Using ASPI
P/E) - LKR
34.82 40.15 43.77
Above displayed are the forecasts for share prices using
AEL’s and ASPI’s P/E averages. AEL’s P/E ratio is currently
at slightly below its long term average, making this an
opportune time period to buy AEL equities and hold for an
immediate-long term period.
AEL P/E Band analysis: 2014-2016
Source: Bloomberg
Source: Bloomberg
The ASPI P/E forecasts Access Engineering surging to the
LKR 40-44 range by the financial year 2017/18, with the
prospect of such a surge being very possible as AEL takes on
new areas in the industry as the stage is set for Sri Lanka to
take off towards higher economic growth. It should be also
noted that the average industry P/E ratio to date is 19.82 which
further reiterates the fact that AEL’s share prices are
undervalued at the current value, leading us to project AEL’s
share price at the LKR 30-33 range by 2018.
Concluding Statements
Sri Lanka presents itself as one of the leading emerging
markets of the world open to foreign and domestic investment,
expecting to achieve a growth rate of 6.9% (World Bank
Annual Report, 2014/15) in the face of a slowing global
economy. Even amid constraints from the global economy, we
expect Sri Lanka’s industries to continue a healthy level of
growth, with the construction industry also expected to
achieve consistent progress. In the face of many infrastructure
developments to take place in the next 5-10 years as Sri
Lanka aspires to establish itself as a trade link to the East and
West while also being endowed with its proximity the surging
economy that is India. AEL which is a major contributor to the
industry is expected to deliver resounding performance in this
space, making this equity a very lucrative immediate-long term
buy, thus we project AEL’s share price range to appreciate to
LKR 30-33 by the financial year 2017/18.
0
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P/ERATIO
TIME PERIOD
AEL VS ASPI P/E Average: 2012-2016
AEL ASPI