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SRI LANKA EQUITY

EARNINGS UPDATE

| CONSTRUCTION
| 30 MAY 2016

Walkers CML [KAPI]: SELL [-20%]

Kanishka Perera
kanishka@asiasecurities.lk
+94 11 772 2044

Debt load bears down on profitability


Walkers CML came in with a weak result for FY16 with EPS declining by
170% YoY to LKR 3.17. This was led by 1) a softer operational performance
(EBIT down 61.4% YoY) while 2) interest expenses showed a significant
jump (+74.2% YoY). While we make minor changes to our operational
forecasts, we revise our interest expense forecasts upwards bringing our TP
down to LKR 34.00/share (-10.8% to old TP; -20.2% upside). While we note
that any clarity by the company on 1) debt service options, and 2) the
project pipeline could result in a change to our estimates, we downgrade
KAPI to SELL.

Key statistics
Bloomberg ticker

KAPI SL

CSE ticker

KAPI.N0000

GICS subsector

Construction & Engineering

Price as at 27 May 16 (LKR)

42.60

52 week Hi/Lo (LKR)

63.80/28.00

Market cap (LKR mn)

7,142

Market cap (USD mn)

49

No. of shares (mn)

168

Interest expenses bear down on already muted operating profits


The company recorded a 74.2% YoY increase in interest expense to LKR 1.2bn
(454% of PBT) which bore down on an already muted result (EBIT down 61.4%
YoY; margin contracted 6.7pp YoY). We are of the view that this came about
on 1) a higher working capital requirement, and 2) higher market rates.

ADT (LKR mn) - 3M

1.3

Working capital worsens; debt load expands


We note that receivables have reached 331 days (211 in FY15) which has
necessitated a higher amount of short term debt (+29.7% YoY to LKR 7.8bn).
Market interest rates have also picked up with prime lending rates climbing by
~200bps for the fiscal year. This has led the softer credit metrics with
debt/EBITDA coming down to 7.9x (3.7x in FY15) while EBITDA/interest has
declined to 1.6x (3.6x in FY15). We note that this would limit KAPIs capacity
to bid for large projects in the future as we highlighted during our initiation.

Source: CSE, Bloomberg, Company data

FY17E DPS (LKR)

0.00

Civil Engineering shows signs of turnaround but, margins shrink


While the Civil Engineering segment showed a significant drop in EBIT for the
year (-47.6% YoY) we highlight that 4Q FY16 has shown some signs of
turnaround with revenue picking up 23.0% YoY to LKR 4.5bn. However, EBIT
margins shrank 13.3pp YoY for the quarter which, to us, remains a concern.

Total return (%)

-20.2

ADT (USD k) - 3M

9.0

ADT (shares k) 3M

29.6

Free float (%)

7.0

Company website | CSE website


Note: LKR converted at 145 LKR per USD
Valuation summary
Price as at 27 May 16 (LKR)

42.60

Target price (LKR)

34.00

Upside (%)

-20.2

Source: Asia Securities


Share price movement (indexed to KAPI)

Other segments put further pressure on profitability


Most other segments came in softer this year with Engineering Services
recording an EBIT of LKR 281mn (-LKR 72mn last year), Marine Engineering at
LKR 2mn (LKR 20mn), Trading at LKR 87mn (-LKR 5mn) while Power came in
positively at LKR 92mn (-LKR 163mn) along with Real Estate (LKR 72mn).
We revise our estimates down on higher interest expense
We make minimal changes to our previous EBITDA forecasts while factoring in a
higher interest expense resulting in our FY17E EPS dropping to LKR 1.77 (LKR
5.07 earlier) while FY18E drops to -LKR 0.06 (LKR 6.67 earlier).
We downgrade to a SELL with a lower TP of LKR 34.00/share
Given the higher than expected debt load and interest expense in a backdrop
of rising rates, we lower our target price to LKR 34.00/share (-10.8% to old TP;
-20.2% upside) on our DCF valuation (WACC @ 15.4%) and downgrade to a SELL.
We highlight that any clarity by the company on 1) debt service options, and 2)
the project pipeline could result in changes to our estimates.

LKR
70
60
50
40
30
20
May-15

Sep-15

KAPI
Movement (%)

Jan-16

ASPI

May-16
S&P SL20

YTD

3M

12M

KAPI

(16)

19

ASPI

(5)

(17)
(9)

S&P SL20

(5)

(15)

Source: CSE, Bloomberg

Financial summary
In LKR mn (FY ended 31st March)
Revenue
EBITDA
Recurring net profit

4Q FY15

4Q FY16

YoY %

FY16

FY17E

YoY %

3,003

4,647

+54.7

11,840

12,700

+7.3

345

396

+14.8

1,809

2,299

+27.1
-44.3

(62)

(266)

+333.0

(532)

(296)

(0.37)

(1.59)

+333.0

(3.17)

(1.77)

-44.3

ROE (%)

12.0

(6.8)

-18.8pp

(6.8)

(4.0)

+2.8pp

P/E (x)

12.2

nm

nm

nm

EV/EBITDA (x)

5.6

9.2

9.2

6.1

P/B (x)

1.2

1.0

1.0

1.1

Diluted recurring EPS (LKR)

Source: Company data, Asia Securities | Note: Historical interim ROE, P/E, EV/EBITDA on a TTM basis
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Estimate review & revisions


In LKR mn
Revenue

FY16E

FY16A

Var (%)

FY17E - O

FY17E N

FY18E - O

FY18E N

11,541

11,840

+2.6

12,738

12,700

-0.3

14,474

14,401

-0.5

1,882

1,809

-3.9

2,342

2,299

-1.8

2,685

2,698

+0.5

373

(532)

-242.6

851

(296)

-134.8

1,118

(10)

-100.9

2.23

(3.17)

-242.3

5.07

(1.77)

-134.8

6.67

(0.06)

-100.9

4.6

(6.8)

-11.4pp

9.8

(4.0)

-13.8pp

11.6

(0.1)

-11.7pp

11.3

nm

8.6

nm

EV/EBITDA (x)

8.5

6.1

7.4

5.2

P/B (x)

1.1

1.1

1.0

1.1

EBITDA
Recurring net profit
Diluted recurring EPS (LKR)
ROE (%)
P/E (x)

Source: Company data, Asia Securities | Note: O Old estimate, N New estimate
Income statement
In LKR mn

FY2014

FY2015

FY2016

FY2017E

FY2018E

FY2019E

Revenue

10,092

14,025

11,840

12,700

14,401

16,351

Operating expenses

(8,290)

(11,632)

(10,031)

(10,401)

(11,703)

(13,187)

1,802

2,393

1,809

2,299

2,698

3,164

EBITDA
Depreciation and amortization
EBIT
Interest income
Interest expense

(540)

(653)

(1,138)

(979)

(1,057)

(1,146)

1,263

1,740

671

1,320

1,641

2,018

119

117

194

193

233

190

(711)

(665)

(1,159)

(1,645)

(1,645)

(1,731)

13

206

Associate/JV income
FX gain/loss
Other non-operating income/expenses

104

19

38

38

38

38

Profit before tax

787

1,417

(256)

(95)

266

514

(130)

(314)

(69)

17

(46)

(90)

657

1,103

(324)

(78)

219

424

(121)

(342)

(208)

(218)

(229)

(240)

Income tax expenses


Profit for the year
Minority interest
Preferred dividends
Recurring net profit

536

761

(532)

(296)

(10)

184

Source: Company data, Asia Securities


Key ratios
FY2014

FY2015

FY2016

FY2017E

Revenue growth (%)

36.6

39.0

EBITDA margin (%)

17.9

17.1

15.3

5.3

5.4

(4.5)

3.20

4.54

(3.17)

0.50

Net margin (%)


Recurring diluted EPS (LKR)
DPS (LKR)
Tan. BVPS (LKR)

(15.6)

FY2018E

7.3

FY2019E

13.4

13.5

18.1

18.7

19.4

(2.3)

(0.1)

1.1

(1.77)

(0.06)

1.10

25.10

44.94

41.64

39.88

39.82

40.91

ROA (%)

8.2

6.7

3.8

3.9

4.9

5.6

ROE (%)

11.9

11.9

(6.8)

(4.0)

(0.1)

2.5

660

(260)

(1,952)

3,340

1,253

1,465

OCF (LKR mn)


Unlevered FCF (LKR mn)

195

(2,147)

(3,304)

2,706

533

648

(203)

(1,074)

311

1,060

(1,112)

416

P/E (x)

6.3

7.2

nm

nm

nm

38.9

EV/EBITDA (x)

4.2

4.6

9.2

6.1

5.2

4.4

P/B (x)

0.7

0.7

1.0

1.1

1.1

1.0

Levered FCF (LKR mn)

Source: Company data, Asia Securities

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Balance sheet
In LKR mn

FY2014

FY2015

FY2016

FY2017E

FY2018E

FY2019E

Assets
Non-current assets
Property, plant and equipment
Intangible assets
Goodwill
Equity method investments
Interest earnings investments

2,604

4,233

4,767

4,424

4,088

3,760

88

85

84

83

82

512

512

534

534

534

534

2,779

3,192

2,370

2,370

2,370

2,370

Other investments

924

924

924

924

Other non-current assets

Total non-current assets

5,898

8,029

8,680

8,336

7,999

7,671

7,383

8,867

12,639

11,482

13,020

14,783

610

2,950

3,004

3,087

3,473

3,914

Prepaid expenses

Other WCA

97

172

385

1,420

312

678

Current assets
Accounts receivable
Inventories

Cash and cash equivalent


Restricted cash
Short term interest earning investments
Other short term investments

1,146

1,670

2,233

2,233

2,233

2,233

Other current assets

517

567

768

768

768

768

Total current assets

9,753

14,227

19,030

18,991

19,807

22,376

15,651

22,256

27,710

27,327

27,806

30,047

1,929

2,851

6,534

6,534

6,534

8,034
104

Total assets
Liabilities
Non-current liabilities
Long term borrowings
Employee benefits

61

84

104

104

104

Other non-current liabilities

99

116

134

134

134

134

2,089

3,051

6,772

6,772

6,772

8,272

Accounts payable

4,482

3,542

3,994

3,907

4,396

4,953

Accrued expenses

Other WCL

7,772

Total non-current liabilities


Current liabilities

Short term borrowings

3,367

5,990

7,772

7,772

7,772

Other current liabilities

611

902

726

726

726

726

Total current liabilities

8,460

10,434

12,492

12,405

12,894

13,451

10,549

13,485

19,264

19,177

19,666

21,723

3,659

6,057

6,057

6,057

6,057

6,057

Total liabilities
Equity
Common equity
Preferred equity

Retained earnings

936

1,610

1,078

782

772

956

Other reserves

124

379

379

379

379

379

Minority interest
Total equity
Total equity and liabilities

383

724

931

931

931

931

5,102

8,770

8,446

8,150

8,140

8,324

15,651

22,256

27,710

27,327

27,806

30,047

Source: Company data, Asia Securities


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Cash flow statement


In LKR mn

FY2014

FY2015

FY2016

FY2017E

FY2018E

FY2019E

Cash flows from operating activities


EBITDA
Other non-cash items
Change in working capital

1,802

2,393

1,809

2,299

2,698

3,164

(1,260)

(2,790)

(3,444)

987

(1,435)

(1,646)

Tax paid

(96)

(163)

(201)

17

(46)

(90)

Other

213

300

(116)

38

38

38

Cash generated from operating activities

660

(260)

(1,952)

3,340

1,253

1,465

(498)

(1,899)

(1,400)

(635)

(720)

(818)

33

13

48

(22)

Cash flows from investing activities


Capex on PPE & intangibles
Proceeds from disposals
Net (acquisition)/disposal of subsidiaries

(55)

(2)

Net (acquisition)/disposal of EMIs

Dividends received

190

Interest received
Other
Cash used in investing activities

121

117

194

193

233

(733)

(889)

(887)

(1,130)

(2,659)

(2,066)

(442)

(487)

(628)

224

Cash flows from financing activities


Issuance/(repurchase) of common shares
Issuance/(redemption) of preference shares

Drawdown/(repayment) of debt

314

1,738

4,775

1,500

Dividends paid to common shareholders

(1)

(79)

(712)

(665)

(1,159)

(1,645)

(1,645)

(1,731)
(240)

Dividends paid to preferred shareholders


Interest paid
Dividends paid to minority interest

(218)

(229)

(85)

49

Cash from financing activities

(484)

1,218

3,665

(1,863)

(1,874)

(472)

Net increase/(decrease) in cash

(954)

(1,702)

(354)

1,035

(1,108)

366

Cash and cash equivalent at BOP

(853)

(1,807)

(3,509)

(3,863)

(2,828)

(3,936)

(2,828)

(3,936)

(3,570)

Other

Effect of exchange movements


Cash and cash equivalent at EOP

(1,807)

(3,509)

(3,863)

Source: Company data, Asia Securities | EMI stands for equity method investments

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Analyst Certification
I, Kanishka Perera, certify that the views expressed in this report accurately reflect my
personal views about the company. I also certify that no part of my compensation was, is, or
will be, indirectly or directly, related to the specific view or recommendation expressed in this
report.

Company Certification
Asia Securities (Private) Limited has no direct affiliation with the company/companies covered
in this report and does not receive any material benefit from the company for publishing this
report.

Disclaimer
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Sales
Institutional Sales

Retail Sales

Sabri Marikar

(94-11) 7722 022

0773-576 868

sabri@asiasecurities.lk

Priyantha
Hingurage

(94-11) 7722 033

0773-502 015

priyantha@asiasecurities.lk

Niroshan Wijayakoon

(94-11) 7722 007

0777-713 645

niroshan@asiasecurities.lk

Subeeth Perera

(94-11) 7722 035

0714-042 683

subeeth@asiasecurities.lk

Shiyam Subaulla

(94-11) 7722 011

0773-502 016

shiyam@asiasecurities.lk

Neluka Rodrigo

(94-11) 7722 036

0777-366 280

neluka@asiasecurities.lk

(94-11) 7722 038

0773-690 749

asanka@asiasecurities.lk

(94-11) 7722 032

0772-548 795

priyadarshana@asiasecurities.lk

(94-11) 7722 037

0777-567 994

sharika@asiasecurities.lk

(94-11) 7722 005

0770-458 028

ashan@asiasecurities.lk

Ruchira Hasantha

(94-11) 7722 013

0773-687 027

ruchira@asiasecurities.lk

Pubudinee
Jayasinghe

(94-11) 7722 029

0775-135 239

pubudinee@asiasecurities.lk

Gagani
Jayawardhana

(94-11) 7722 014

0714-084 953

gagani@asiasecurities.lk

Niroshan Rathnam

(94-11) 7722 006

0773-717 515

ratnam@asiasecurities.lk

Miflal Farook

(94-11) 7722 010

0772-253 730

miflal@asiasecurities.lk

Charith Perera

(94-11) 7722 015

0773-598 937

charith@asiasecurities.lk

Asanka
Samarakoon
Romesh
Priyadarshana
Sharika
Rathnayake
Ashan Silva

Kalana Gangadara

(94-11) 7722 028

0773-959 438

kalanag@asiasecurities.lk

Foreign Sales

Bhanu Ganegama

(94-11) 7722 031

0771-848 789

ganegama@asiasecurities.lk

Dinusha Gomes

Tharindu
Priyankara

(94-11) 7722 026

0777-282 586

priyankara@asiasecurities.lk

Gayan Nishshanka

(94-11) 7722 027

0777-569 640

nishshanka@asiasecurities.lk

Gayan Perera

(94-11)-7722 020

0777-567 941

gayand@asiasecurities.lk

Thushara Adhikari

(011)-5735 122

0773-688 202

adhikari@asiasecurities.lk

Nuwan Eranga

(011)-5735 122

0777-368 0.12

eranga@asiasecurities.lk

(94-11) 7722 030

0773-002 274

dinusha@asiasecurities.lk

Branches
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Karunatilake

(031)-5676 881

0773-691 685

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Nilupul
Hettiarachchi

(081)-5628 500

0777-410 164

nilupul@asiasecurities.lk

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Shermin
Ranasinghe

(047)-5679 240

0777-681 866

shermin@asiasecurities.lk

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Gratian Nirmalan

(021)-5671 800

0777-567 933

nirmal@asiasecurities.lk

No: 88, Sri DhaladaVeediya, Kandy (CSE Kandy Branch)

Hambantota

Service Centers
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Research
Head of Research
Kanishka Perera

(94-11) 7722 044

kanishka@asiasecurities.lk

(94-11) 7722 046

srimal@asiasecurities.lk

(94-11) 7722 042

mangalee@asiasecurities.lk

(94-11) 7722 043

hasantha@asiasecurities.lk

(94-11) 7722 045

lakshini@asiasecurities.lk

Osadi Hettiarachchi

(94-11) 7722 048

osadi@asiasecurities.lk

Thilini Amarasiri

(94-11) 7722 047

thilini@asiasecurities.lk

Manager - Research
Srimal Liyanage
Mangalee
Goonetilleke
Hasantha Uswatta
Lakshini Fernando

Financial Analyst

ASIA SECURITIES (PRIVATE) LIMITED


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