State funding crunch bites into Access Engineering as projects worth Rs.40bn get suspended

Access Engineering PLC has seen the suspension of Rs.40 billion worth projects after the government ran out of money in April forcing the country to declare bankruptcy for the first time in its history, but analysts say that the company could rebound faster than its peers after a downturn in the short-term. 

The company entered the new financial year beginning April 1, 2022 with Rs.100 billion in projects in its order books, but with 40 percent or Rs.40 billion worth projects on hold, combined with the escalating costs of construction materials and rising finance cost due to soaring interest rates, that could dent the top and bottom lines of the group in the current financial year. 

According to First Capital Research, analysts who parsed the most recent interim reports of the group and also had conversations with its management said with the balance 60 percent of the projects remaining intact and other donor-funded projects continuing alongside the improved contribution from its real estate joint venture, Capital Heights residential project, 

could partially offset the pressure on revenues. 
“Given the prevailing operating environment in the country coupled with rising prices of construction related material, we expect the performance to slowdown during the 1HFY23”, the research house said in an earnings update on the company. 

“Further, the suspension of new construction projects and with no new projects awarded as of 4QFY22, it is also expected to contribute towards the dip in earnings,” they added. 

The majority of the halted projects appear to be related to road development as the Cabinet fortnight ago decided to either cancel or suspend all capital-intensive projects proposed under budget 2022 and reallocate such funds to assist the people affected by the economic crisis.  Access Engineering has been one of the leading contractors for road and other infrastructure development projects in Sri Lanka for years, and it is also one of the largest asphalt and concrete producers, recently having built more capacity in asphalt production with the commissioning of new plants in Ganewalpola and Mathugama. 

The company until recently was very much upbeat on road development projects as the government was pushing forward its 100,000 kilometre road development project, some of which were funded by multilateral funding agencies such as the World Bank and Asian Development Bank.  Hence, they were hopeful that such donor-funded projects would continue and ensure continuous cash flows. 

Despite the suspension of road and other State-funded infrastructure projects, the government has indicated its interest to continue to invest in water projects. Access Engineering enjoys margins as high as between 25 to 30 percent on water and wastewater management projects, First Capital Research said.  For the financial year ended March 31, 2022, Access Engineering reported earnings of Rs.4.30 billion compared to earnings of Rs. 2.49 billion in the previous financial year.