Listed construction firm Access Engineering Plc is undergoing a remarkable, yet unsurprising, reversal. With an order book that will keep it busy for the next four years, the company will also benefit from a construction boom in the making, according to a First Capital Research report titled ‘Access Engineering: Road Laid for a Sustainable Drive’.

Access Engineering reported a 17% drop in revenue from a year earlier to Rs10 billion during the six months to end September 2020, with profits falling 26% to Rs577 million.

However, earnings grew 8% from a year earlier in the September quarter despite a 3.3% revenue decline helped by lower borrowing costs thanks to the Central Bank’s monetary stimulus of low-interest rates to resuscitate businesses impacted by the lockdowns, curfews, and travel restrictions to contain Covid’s spread.

Access Engineering reported its lowest earnings in nine-years of Rs979 billion in the 2019/20 financial year, down 54% from a year earlier. The construction segment contributes 67% to group revenue followed by construction material sales 12%, automobile sales 17%, and other segments, including property and energy, grew 4%. Rental and property income grew 6% from a year earlier to Rs1.6 billion during the 2019/20 financial year, and automobile sales fell 62% to Rs4 billion due to import restrictions.

During this period, income from constructing buildings grew 28% to Rs9.8 billion due to import restrictions knocking out competitors, and highway construction halved to Rs3.7 billion. Water and drainage projects brought Rs2.3 billion, up 17% from a year ago while bridge-building revenues fell 94% to Rs16 million.

Access Engineering thrives when governments focus on infrastructure development, so it is no surprise that its profitability gradually eroded since 2017, years of policy instability and political uncertainty under the Yahapalanaya government. However, First Capital estimates robust earnings growth of 30% annually over the next three years to Rs2.8 billion based on its changing fortunes due to the present government’s strong infrastructure focus.

Public investments as a share of GDP halved to 2.6% in 2020 due to the pandemic lockdown and social distancing requirements, but will recover sharply to 5.4% in 2021, and hover at that range over the next three years, according to estimates provided by First Capital Research. In fact, public investments will average Rs1.1 trillion from 2021- 24, double the Rs511 billion annual average in the previous decade (2010-2020).

The public investment boom and committed foreign financing available over the next 3-5 years amounts to $8.7 billion, will boost the construction industry. The sector is estimated to average 10% growth each year from 2020-24, First Capital says. The construction industry’s contribution to GDP fell to a seven-year low Rs806 billion in 2020. The sector will now more than double to about Rs1.8 trillion by 2024, with more than half the public

investment projects dealing with highways (25%), water supply, sanitation, and irrigation (24%), and housing and urban development (5%).

“Access Engineering has exposure to these dominant areas in construction. It has a project pipeline estimated to be worth Rs32.4 billion rupees over the next four years,” notes Atchuthan Srirangan, author of the First Capital report (see graph). The company could expect an annual revenue growth rate of 12% over these four years.

Access Engineering’s profitability will improve, but margins could halve as it ventures into the affordable housing segment with Capital Heights, a 242 high-rise, and a more ambitious 1,068-unit Marina Square. Capital Heights is 90% complete and half the units already sold. Marina Square is in the superstructure development phase with 391 apartment units (out of 1,068) pre-sold. The listed construction firm’s largest gains will come from the highways and urban development sectors. The government plans to build 100,000km of new roads, upgrade bridges and expand its highway network.

However, the game-changer for Access Engineering could be the Colombo Port City developed by the China Harbour Engineering Company. Access will benefit from the relationships it has cultivated with several large Chinese construction firms already operating in the island. Colombo Port City will occupy 269ha of land reclaimed from the Indian Ocean with an investment of $1.4 billion and attract foreign direct investments worth $15 billion to develop into an international financial centre.