Overseas expansion- another growth prospect we are actively pursuing

‘Mirror Business S&P SL20 Insights’ is conducted in collaboration with the Colombo Stock Exchange as an investor relations initiative. The interview series encourages S&P SL20 companies to talk on the developments of their respective industries and growth prospects. Following are excerpts from an interview with Access Engineering PLC Managing Director Christopher Joshua where he talked about the firm’s financial performance, industry challenges and opportunities.

What are the key milestones achieved by Access Engineering in 2019? 
Financial year 2018/19 was yet another good year for Access Engineering PLC where we recorded our highest revenue amounting to over Rs. 32 billion while generating a net profit attributable to the equity holders of over Rs. 2.1 billion. Group’s Earnings per Share was Rs. 2.15 and we were able to increase our net assets per share upto Rs. 21.19.
Apart from the impressive financial performance, Access Engineering was able to secure significant projects in the segments of transportation, water, urban infrastructure, renewable energy and others, adding new milestones to our project portfolio. One of the notable projects commenced within the year was the Mannar Wind Power Project which we commenced in partnership with, Vestas Asia Pacific A/S, the world’s largest wind turbine manufacturer. 

We undertook the civil engineering work in this 100 MW wind power project, which is the first of this scale in the country. Access Engineering’s flagship projects in real estate, Marina Square Colombo and Capital Heights Rajagiriya made substantial progress within the year with Marina Square having completed piling works, commenced on the super structure construction and Capital Heights completing a major part of its super structure during the year. 

We are involved in the construction of the Central Expressway a much-needed expressway for improving transportation efficiency to the Central Region of the country.

We also carried out work in a number of commercial and residential projects which included the UDA Public Sector Housing project, UDA Phase II Urban regeneration housing project, Waterfront Integrated Resort project, New Odel Mall Development , Bloemendhal Housing project, new building for the Sri Lanka Institute of Nanotechnology etc.Our order book was further strengthened in 2019 with the award of Kohuwala and Gatambe Flyovers which are scheduled to commence in 2020. 

Our efforts in to related diversification continued during 2019 where we acquired 100 percent of WUS Logistics Private Limited, making an investment of approximately Rs. 1 billion. This company is engaged in the development of approximately 500,000 Sq. Ft. of purpose-built warehouse for an international tyre manufacturer and work in this regard also 
commenced in 2019.

In 2019, we also made headlines in the sustainability front where we were recognized as a ‘Top 10 Corporate Citizen’ by the Ceylon Chamber of Commerce, for the 3rd consecutive year. Similarly we became the ‘Winner’ in the construction sector, for the 7th consecutive year. 

Please outline the three most important macro trends that you believe will impact the industry you operate in?
Sri Lanka underwent a challenging year where a slow growth momentum in economic activity prevailed for the mostpart of the year further aggravated by the Easter Sunday Attack. The corporate tax rate applicable to the construction sector which remained at 12 percent for decades to encourage investments in this sector, was increased to 28 percent during the previous government.  Following the Presidential Election in November 2019, the corporate tax rate applicable to construction sector was reduced to 14 percent.  This positive measure would have a big impact on the construction industry which has been undergoing turbulent times and hardships during the recent past. 

The abolishment of 2 percent NBT and the reduction of VAT rate from 15 percent to 8 percent will also have a positive impact on the cost of construction. The Sri Lankan Rupee experienced a relatively stable rate against the US Dollar in 2019. We expect this to continue in the future and it will have a positive impact on the imported raw materials such as steel, cement, etc.

The VAT rate which was previously applicable for Condominiums for a short period of time was also abolished in November 2019 and this move will positively impact the Real Estate sector also giving a boost to both our condominium development projects Marina Square Colombo and Capital Heights Rajagiriya. Stabilization of the Rupee is also expected to have a positive impact on the sale of apartments. 

Due to fiscal initiatives that will result in a reduction in government revenue there is likely to be increasing pressure on the budget deficit during the short term. The Government would need to source and mobilize funds and other initiatives to carry out the planned mega construction projects including the expressways, roads, bridges, public houses, irrigation and water supply projects etc., during this recovery phase. 

Could you elaborate a few growth prospects for the company going forward and how you intend to capitalize on these growth opportunities?
The construction sector being as competitive as it is, shows growth prospects for industry players, even during periods of slow economic growth. Businesses, who are prepared and identify such opportunities and are in a position to engage in them, will continue to have prospects for growth and expansion. .

We see short to medium term growth potential for the industry both from the public sector as well as the private sector. From the public sector, there is much needed infrastructure that needs development, enhancement and maintenance.

These developments and rehabilitations are required to complement and facilitate the country’s economic growth agenda. There are also investments made by the private sector in large scale development projects in housing, real estate and tourism sectors. Development of the Colombo International Financial City too is underway. These developments will continue to provide opportunities for Access Engineering and the construction industry in general. 

Based on company’s past experience, the demand for ‘A’ grade office space is continuously on the rise with Access Tower II being fully leased out even prior to the launch of commercial operations in August 2017. This shortage is expected to further increase continually unless new developments are undertaken to cater this demand. 

Moreover, according to research, commercial rentals are inflating at 10-15 percent biennially, due to the excessive shortage of commercial space. Based on the success of Access Tower I and II, Access Engineering is looking forward to a similar development in an adjacent land. Our acquisition and investments into WUS Logistics has given us the opportunity to develop and lease out high-end warehousing facilities to multinational businesses where the growth prospects seem very promising.  

With ever changing needs of the customers, diversification of product portfolio has always been a growth prospect in the construction sector. Where necessary, Access Engineering adds new business verticals within the core construction activities, in order to gain new experience in diversified fields of engineering. The latest addition to this was the Mannar Wind Power Project which was a completely new area of operation. 

 Overseas expansion is another growth prospect the company is actively pursuing. Given the successful partnerships we have built over the years with reputed international contractors we are hopeful of jointly executing work in specialized engineering fields. We also believe real estate to be a catalyst of our growth in the medium term given our investment in 2 sizable projects namely Marina Square Colombo and Capital Heights Rajagiriya. 

In your opinion, what challenges do you anticipate in the industry that you operate in?
Construction and engineering sector has always been a complex industry and mastering complexity is always a challenge. One of the major challenges in the industry is the shortage of skilled laboure specially in the fields of carpentry, masonry and bar bending. 

The industry is also prone to a very high level of labour turnover. Access Engineering continues to conduct vocational training programmes and other mentoring programmesas a solution to this challenge. One such effort is the mentoring programme Access Engineering carries out in partnership with the University of Moratuwa, which continued in 2019 as well.

The industry would also face difficulties, in the event of the continuous devaluation of the rupee. The rising price of raw materials, cultural mismatches in overseas expansions, deteriorating credit facilities granted for the industry and competition from foreign construction firms which operate in the Sri Lankan market, are among other challenges the Industry would need to deal with. During the past few years, the industry was also hampered due to lack of proper policy directives, significant and frequent changes in the tax structures and slow approval processes. 

Focusing on the shareholder, what efforts and initiatives are you taking to drive shareholder value? 
Access Engineering constantly works towards driving shareholder value through outstanding financial performance by timely securing and implementation of projects and vigilant and pro-active business development. The company’s objective of capital management is to maintain a strong financial position and healthy capital ratios in order to safeguard the company’s assets in order to maximize shareholder value. 

Access Engineering’s results are consistent and the company offers its shareholders healthy dividend payouts every year. We expect to continue with our dividend policy of declaring 40 percent- 50 percent of company profits as dividends. 

Increasing the company’s net assets and the quality of our assets remains a priority for us and we believe that this will increase shareholder wealth in future. Our investments in the real estate portfolio consisting of Access Tower I & II have appreciated in value over the years. So have been our investments in other real estate projects.

The most significant and valuable initiative to drive shareholder value is our continuous efforts and pursuit to remain ‘the foremost Sri Lankan business Enterprise in value engineering’. We continue to retain and attract the best human resources available in the industry and they continue to make significant contributions towards our value addition.

Finally, what is your message to Access Engineering shareholders?
Whilst conveying our appreciation and thanks to all our valued stakeholders for placing their trust and confidence in us, I would like to reiterate that as the custodians of your wealth, the Board of Access Engineering PLC is fully committed to diligently maximize same. 

We are supported by a multi-talented team of employees, a very dedicated and competent corporate management team and headed by a very knowledgeable and experienced Board of Directors. As a respectable corporate citizen we understand the duty of stewardship and all our decisions and actions are aimed at creating more value to you and all our other stakeholders.