KAPI ASIA 2015 Q4 Sell

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
1
This report is strictly for direct recipients from Asia Securities. Redistribution of this report is strictly prohibited. Please see page 5 for analyst &
company certification and important disclosures
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
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
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)
2
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

3
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
4
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
The report has been prepared by Asia Securities (Private) Limited. The information and
opinions contained herein has been compiled or arrived at based upon information obtained
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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
CSE Floor
CSE,01-04, World Trade Centre, Colombo 1
Negombo
72/A,2/1 Old Chilaw Road, Negombo
Uthpala
Karunatilake
(031)-5676 881
0773-691 685
uthpala@asiasecurities.lk
Kandy
Asia Securities (Pvt) Ltd, Cey Bank House
Nilupul
Hettiarachchi
(081)-5628 500
0777-410 164
nilupul@asiasecurities.lk
59/A, Main Street, Hambantota
Shermin
Ranasinghe
(047)-5679 240
0777-681 866
shermin@asiasecurities.lk
147,2/3, K.K.S Road, Jaffna
Gratian Nirmalan
(021)-5671 800
0777-567 933
nirmal@asiasecurities.lk
No: 88, Sri DhaladaVeediya, Kandy (CSE Kandy Branch)
Hambantota
Service Centers
Jaffna
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

2nd Floor, 176/1 2/1,
Thimbirigasyaya Road,
Colombo 05, Sri Lanka
Tel: +94 11 7722000
Website: www.asiasecurities.net

KAPI ASIA 2015 Q4 Sell

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SRI LANKA EQUITY

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

Debt load bears down on profitability

Construction & Engineering

Price as at 27 May 16 (LKR)

52 week Hi/Lo (LKR)

Market cap (LKR mn)

Market cap (USD mn)

No. of shares (mn)

Interest expenses bear down on already muted operating profits

ADT (LKR mn) - 3M

Working capital worsens; debt load expands

Source: CSE, Bloomberg, Company data

FY17E DPS (LKR)

Civil Engineering shows signs of turnaround but, margins shrink

Total return (%)

Free float (%)

Company website | CSE website

Target price (LKR)

Source: Asia Securities

Other segments put further pressure on profitability

Source: CSE, Bloomberg

Diluted recurring EPS (LKR)

Estimate review & revisions

Profit before tax

Income tax expenses

Source: Company data, Asia Securities

Revenue growth (%)

EBITDA margin (%)

Net margin (%)

OCF (LKR mn)

Levered FCF (LKR mn)

Source: Company data, Asia Securities

Other non-current assets

Total non-current assets

Cash and cash equivalent

Other current assets

Total current assets

Other non-current liabilities

Total non-current liabilities

Short term borrowings

Other current liabilities

Total current liabilities

Source: Company data, Asia Securities

Cash flow statement

Cash flows from operating activities

Cash generated from operating activities

Cash flows from investing activities

Net (acquisition)/disposal of EMIs

Cash flows from financing activities

Dividends paid to common shareholders

Dividends paid to preferred shareholders

Cash from financing activities

Net increase/(decrease) in cash

Cash and cash equivalent at BOP

Effect of exchange movements

(94-11) 7722 022

(94-11) 7722 033

(94-11) 7722 007

(94-11) 7722 035

(94-11) 7722 011

(94-11) 7722 036

(94-11) 7722 038

(94-11) 7722 032