Sumal Perera—founder chairman of listed Access Engineering, a construction company—envisions this to be Sri Lanka’s future, his face lighting up with a smile talking about it: He sees silver-blue buildings dotting the skyline, some wearing a green crown of natural foliage, others studded here and there with hanging gardens.
Inside, people are engrossed in work. The aesthetic, natural light-filled office spaces making them feel energetic and happy. Towards evening, another productive day behind them, people leave their offices to unwind at the spa or let it all go at the gym, a few floors below their office. Workmates banter over drinks at the penthouse bar before brainstorming over dinner at the restaurant there. On the rooftop, staff of one tenant company party wildly. The soft drone from a stream of vehicles—from SUVs, small cars and motorbikes—driving away from the building from earlier that evening is now a trickle. A three wheeler is hailed by someone leaving the rooftop party early but tipsy, but it races away noiselessly, perhaps to the nearest charging point as its battery is running low.
Perera’s smile keeps changing hue ever so slightly—from child-like wonder, talking about the future of Sri Lanka, to subtly sinister when he talks about making it all happen. People’s aspirations are evolving. To survive, companies must evolve and cater to changing lifestyles. People are demanding better workspaces and they care about the environment. “Access is proactive in this,” Perera says.
The construction firm, since listing in 2012, is building a war chest of capital to acquire new businesses. It was earlier used to fund acquisitions of construction-related businesses, but its purpose has now shifted. The war chest filled with half of annual profits is funding acquisitions of non-construction businesses like real estate, especially revenue-generating office spaces and a Jaguar Land Rover dealership. Access Engineering built and fully owned office building Access Towers 2 is opening for corporate tenants in 2017. Architectural and interior design borrows from well-known concepts of vibrant and energetic workspaces. The 30-storey building in Colombo will have a food court, gym, spa, penthouse restaurant and bar, and rooftop entertainment area. The building’s double-glazed glass façade lets in plenty of light. The building will harvest rainwater.
The construction group is expanding a motor vehicle dealership for Jaguar Land Rover, SML Frontier, a company it controls via Access subsidiary listed Sathosa Motors. “Electric-powered transportation is the future. Everyone is asleep because oil prices are low, but it’s not going to last.” Access sees potential in transforming Sri Lanka’s transportation sector by introducing a range of electric vehicles – from luxury SUVs, to electric tuk tuks and motorbikes. When Access Engineering listed in 2012, the construction business contributed 95% to group revenue. Four years later, construction’s share of group revenue is down to 76%. Sathosa Motors, a listed vehicle dealership it owns, became the second-largest revenue maker for the group, at 22%.
“Although our reputation has been built on an engineering foundation, I will be very disappointed if it is still the same 10 years from now. I personally would feel that I and the management have failed the company,” he says.
Access Engineering – a Rs17.6 billion revenue company – will invest its war chest of construction boom profits in property and shares of office complexes, malls and hotels over the next few years. It does not want to build and sell, but own assets that will generate rent income and appreciate in value over time.
“Look at John Keells Group (Rs93 billion in revenue). It’s doing great things and sustaining growth, but it is also benefitting from assets invested in a long time ago. They had the vision to build a large land portfolio, giving them the ability to leverage and grow. That’s what we want to do at Access,” Perera says.
Access is planning several real estate investments, mainly in joint ventures, to develop three million square feet of commercial space by 2020, it forecasts. For a construction company, accumulating real estate assets has a tradeoff. “We can build apartments and sell, making quick profits and increasing shareholder returns, but this is not what we want to do,” Perera says. Shareholder returns, as indicated by ROE however, have fallen gradually from 22% in March 2011 to 13.7% in September 2016 due to profits falling slightly from Rs29 billion in 2014 to Rs25 billion in the year to March 2016 owing to construction activity slowing down with the 2015 government change and Access’ investments in real estate.
“Access’ construction business can provide good ROEs and dividends going forward. But at this stage, we are more interested in building our assets. We will want to see our net assets per share growing. People may ask why invest in assets instead of meeting ROEs. But this company is not for us, but for future generations,” Perera says. Net asset (minus all liabilities) per share has grown 125% to Rs16.3 in March 2016 from Rs7.24 in 2011. “In five years, I want to see net asset per share at Rs25. This is a very conservative estimate, and I would be disappointed not to achieve this,” Perera says.
Access is well known for building roads, bridges, water treatment plants and high-rise housing, benefitting from a government-funded construction boom intensifying after the civil war ended in 2009. Its work in port development projects in the capital Colombo and Hambantota in the South helped Access consolidate relationships with the big Chinese firms building them, bagging contracts in Chinese projects in Africa and the Pacific.
The company went public in 2012, listing its shares at Rs25 each. Within three years, the share price grew 70%, peaking at Rs43.50 in November 2014. It was the darling of the stock exchange, until the government changed in 2015. “Construction is a dangerous business to be in,” Perera says. “It is more dependent on external factors than management has control over. For example, just after the government change, there was a lull in infrastructure work.”
The 2015 government change slowed down the construction boom. Access lost projects worth Rs4 billion that year and its order book (Rs50 billion at end-2014) halved. Investors perceiving political fallout for Access exited the stock, sending its price down to a low Rs18.50 in 2015. The share continued to trade below its IPO price for most of 2016. However, portfolio managers trained to hunt value saw a different company.
During 2015-16, most portfolio managers doggedly held Access shares or increased their exposure. Portfolio managers usually buy into good companies when sentimental markets undervalue shares. The world’s largest sovereign wealth fund, Norway’s Government Pension Fund Global, invested in Access shares in 2015, increasing its holding in 2016 (see page 115).
Access was a good bet for three reasons: one, the company’s proven engineering expertise will attract new construction projects from the government. Access is also diversifying in terms of order book composition— securing more private sector construction projects—and getting into other non-construction businesses; this is the second reason. Third, Access’ financial results are sound. Revenue did not take a hit despite the construction slowdown, growing 6.7% to Rs17.6 billion in the year to end-March 2016, the highest since listing. “We did not get affected because our share of government infrastructure projects is not as big as many people assume. We don’t even get one percent of the work, but we take the lucrative parts,” Perera says. Access rarely bids for government contracts, instead offering specialised engineering work for other contractors who get the projects, he says.
Its order book, which halved to Rs24 billion in November 2015, grew to Rs32 billion by September 2016 including work in listed John Keells Group’s $850 million, 4.5 million square foot mixed development project Cinnamon Life in Colombo—which will include an up market 800-room hotel—and laying underground fibre optic cables for listed telco Dialog. By December 2016, Access’ order book expanded to Rs45 billion – 80% of these government infrastructure projects.
Investor sentiment is now improving, as indicated by Access’ P/E ratio. Investors were willing to pay Rs10.9 for every Rs1 the company made in profits by September 2016, up from a low 6.6-times P/E ratio in 2015. Access’ share reached its Rs25 IPO price by the third week of December 2016. Most companies aren’t too bothered about minority shareholders foregoing dividends to plough back profits to finance growth, but Perera says he wants a balance. From 2012 to 2016, Access retained on average 50% of annual profits each year, ranging from 33% in 2012 to 79% in 2014. “Going forward, 50% will be the threshold,” Perera says. Access’ retained profit war chest bulged to Rs8.3 billion by March 2016—from Rs1.1 billion five years ago—to nearly 30% of its balance sheet, quadrupling shareholder funds, or assets minus liabilities, to Rs17.3 billion – equal to Access’ revenue that year. On top of that, Access also raised Rs5 billion via debentures in November 2015.
“I am tempted to invest in bank savings or fixed income assets, with interest rates going up. I can increase our PE and shareholder returns. If I were a paid CEO, I may have taken this approach,” Perera says. Access is slowly deploying its war chest to build its real estate asset base via four subsidiaries and one joint venture. The 2015 Rs5 billion debenture money was parked in bank savings, where it sat for most of 2016, September quarter financial statements showed.
Access Realties is a subsidiary controlling office complex Access Tower in Colombo and immediate neighbour Access Tower 2, which is nearing completion. Twelve-storey Access Tower, built in 1988, is the group’s headquarters, enjoying 100% occupancy by renting office space to other companies. By March 2016, Access Realties owned 13% of the group’s Rs36 billion in assets, but at Rs213 million contributed just 1% to group revenue. However, net profit margins are high at 87%.
Access Tower 2 will be completed in 2017 and generate rental income for Access, but returns will not be as attractive had it sold apartments. The company invested Rs4 billion from retained profits and Perera expects a return of 8%. “People may ask whether it was better to invest the money in the bank, but this property will generate much more for the company in the future.”
In 2015, the company invested around Rs1.2 billion in three real estate companies jointly holding 21 acres in Malabe: Horizon Holdings Ventures, Horizon Knowledge City and Horizon Holdings. These subsidiaries did not see any business activity that year.
Access’ only joint venture real estate project is a Rs800 million 2015 investment on a 35-floor building project at Rajagiriya developed by Blue Star Construction, a firm based in the Middle East.
“We are accumulating assets that will bring returns over a longer period because commercial renting rates are increasing: right now, there is an upward spiral. Access Tower 2 is attracting rental rates more than double from what they were five years ago,” Perera says. “We will have one of the cheapest prices per square foot in the country because of value engineering. We are more than just a developer. We can engineer, procure and contract, so we have better control on our cost and get a better price,” Perera says. Sumal Perera says he doesn’t plan for more than five years, but harbours a wish to transform Access Engineering over the long term. Access Engineering went public in 2012 with two subsidiaries – Access Realties and Sathosa Motors, a listed vehicle dealership here for Isuzu. Through Sathosa Motors, Access owns a 50% share in SML Frontier, the local agent for Jaguar Land Rover. Access is planning to list SML Frontier on the Colombo Stock Exchange in 2017.
“I am very bullish about some major products and partnerships in the electric vehicle field. It may be a car, two wheeler or even tuk tuks,” Perera says, not wanting to disclose his plans.
Globally, the vehicle industry is undergoing an exciting transformation. Jaguar is releasing an electric SUV doing 300km on a single charge, its battery taking an hour to charge. Italian motorbike maker Piaggio manufactures a range of electric bikes and scooters, including Vespa, its flagship brand. In the Netherlands, a company called Etuktuk produces electric tuk tuks for European and Asian markets.
In Switzerland, the city of Zurich has luxury tuk tuk services offering sightseeing tours while sipping wine and nibbling on Swiss cheese. Perera doesn’t see strong profit growth over the next few years as Access increases its real estate asset base. He estimates annual net profits at Rs2.5 billion over the next two years, or slightly higher.
Despite the focus on real estate and, to a lesser extent, motor vehicles, construction will continue to be a profitable business for Access. “When we invest in real estate, we may not even build most of them. We will contract other construction firms, reserving our capabilities for lucrative specialised engineering work here and overseas,” Perera says.