Executive Summary

This report analyse about the two construction companies. One of them operates in the Middle East Market and the other one operates at Sri Lankan Market.
To analyse the Sri Lankan construction company the author has selected the Access Engineering PLC and to analyse the middle least market the author have selected Drake & Scull International. Financial performance and the financial position will be discussed in detail in this report and finally the report will suggest few strategically important insights for the business to be profitable and competitive in the market.

Introduction

The construction industry is one of the growing and profitable industries in the world. Construction industry’s growth is exceptional or substantial in recent past. The main reasons for the exceptional growth in the industry are the rapid increase in the world population and the unavailability of the land and natural resources. In this report the author explains the business operations of Access Engineering PLC and Drake & Scull International. Further, the author evaluates the strategies used by the Access Engineering PLC and Drake & Scull International in order for them to increase their market share, to manage their liquidity and profitability, to build and maintain an effective and efficient supply chain and the bidding strategies for the business as a whole.

Post war environment created many opportunities to the business organizations which operated in the construction industry in Sri Lanka. The main reason for this was that there were no restrictions or barriers for the people to visit northern or southern part of the countries and as a result of this people who lived in south started to travel north and the people who lived in the north had started to travel south. Further, the end of war in the country gave a positive message to the international society and the foreigners also started to travel Sri Lanka to explore the beauty of the country. All these changes led to develop the tourism and the hospitality industry in Sri Lanka. The growth in the tourism and hospitality industry had created significant demand for luxury star hotels and as a resulted of that business entities in the construction industry had obtained a lot of projects. In addition to, the government of Sri Lanka had concentrated highly on the development of the country. They were developing infrastructure facilities like highways, ports, airports and conference halls to grow and develop the country. Such developments projects and the growth in the tourism industry had attracted many business people in Sri Lanka and many started the construction companies in Sri Lanka.

The economic and political environment does not look good in Middle East. Many factors had contributed for this. Important reason for the economic recession expereiced by countries in the Middle East is that the drop in the oil prices. The main source of income of a country in Middle East is the income generated by selling oil to other countries. Continuous decrease in the oil prices had decreased the total Gross Domestic production in the countries. Further, as a consequence of the drop in the oil prices they had to cut jobs for the people and they were facing problems in financing the construction projects which they had started for Expo 2020 and FIFA 2022 world cup. Due to cash flow problems the companies which operates in the construction industry had to abandon or give many of their projects and had to suffer substantial losses. However, the investors and the firms in the construction industry believe that the price of the oil will be back to its usual price in near future and after that there will not be any cash flow issues for the firms to run their business activities. In this report the author discuses about the Access Engineering PLC and the Drake Scull International.

Access Engineering PLC

Access Engineering PLC is one of the well-established construction company in Sri Lanka. The business entity is well-known among the private sector and the government sector. The Access engineering PLC undertakes many of government projects like developing road structure and bridges in various part of the country. Further, it has acquired or created related organisations or subsidiaries to perform the construction activities in the Sri Lanka. It normally undertakes projects like bridges and flyovers, roads and highways, buildings, water treatment plants and water supply, land drainage and irrigation schemes, telecommunication infrastructure, and aviation projects. In addition to the projects mentioned above, they provide consultancy services for the clients who intend to obtain direction on engineering and construction. The consultancy and engineering services mostly related to design engineering, pilling and reclamation services. In addition, it designs and constructs waste management facilities comprising incinerators, composting, waste treatment facilities, etc.

Further, the company offers asphalt concrete, cement concrete, and crushed rock aggregates; and metal ceiling panels, as well as franchises aluminum doors, windows, and curtain wall systems. Additionally, it engages in the development, management, sale, and lease of high rise buildings; import, distribution, and sale of motor vehicles and spare parts; and repair and maintenance of heavy machinery and equipment, and heavy vehicle fleet. The company was founded in 2001 and is based in Colombo, Sri Lanka. Access Engineering PLC is a subsidiary of Access Group of companies (Pvt). Further, it is important to mention that the Access engineering PLC had generated Rs 2.67 billion from Water and Drainage construction in 2016 and it was Rs 1 billion in 2015. Which shows the extent of the growth that the business had experienced in last year. In addition to that they had won many government contracts or projects which to be started in future.

Drake Scull International

The Dark & Scull International was initially established in 1966 and it was the first office in the Middle East. Nearly 90 years after being originally founded in the United Kingdom. Currently, the company’s operations extend throughout the region and across the globe with offices in Dubai, Abu Dhabi, Saudi Arabia, Kuwait, Qatar, Oman, Egypt, and Jordan, Algeria and India, in addition to managing projects in Europe and other parts of North Africa.

With its diverse range of business, Drake & Scull have held a leading role, creating some of the region’s most iconic landmarks. Our main business streamlines ideally cater to industry demands. Drake & Scull Construction (DSC), which acts as the General Civil Contracting unit, Drake & Scull Engineering (DSE), which offers Mechanical, Electrical and Plumbing solutions, Drake & Scull Rail & Infrastructure (DSR&I) focusing on rail networks, rail stations and district cooling related infrastructure, Drake & Scull Oil & Gas (DSOG) focusing on Onshore and Offshore oil facilities, Pass Avant Energy & Environment (PE&E) which caters to Water and Waste Water Treatment and Drake & Scull Development (DSD) which addresses Public Private Partnerships (PPP).

 

In just 5 decades, the company has evolved into an internationally renowned, multi-billion dollar organisation while firmly maintaining its solid track record of sustained profitability. In 2008, DSI offered 55% of its shares to the public and the IPO was oversubscribed 101 times. Ernst& Young ranked the IPO among the top 20 global IPOs of that year.

We continue to lead by example, even under the most challenging circumstances. DSI is consistently moving forward with new expansion strategies, inventive business models and unmatched quality standards. The fully Integrated Management Systems, certified to ISO 9001:2008, ISO 14001:2004, ISO 27001:2013 and OHSAS 18001:2007 standards are compliant with leading building, health and safety regulations, as well as sound environmental and energy management procedures.

Financial Performance Analysis

Access Engineering PLC- Financial Performance

Access Engineering PLC had performed well in terms of the profitability in 2016 when compare with performance in 2015. In this part the author analyse the financial performance and the financial position of the business in 2015 and 2016. For that purpose, the author had used the accounting ratios. The author uses revenue growth, GP margin, and Operating Profit Margin and Net Profit margin to assess the profitability of the business in 2016. Further, the author uses the current ratio and gearing ratio to assess the financial position of the business as at 31st March 2016 and 31st March 2015.

The revenue of the business was Rs17.6 billion in 2016 and it was Rs16.51 billion in 2015. It can be observed that the revenue had grown by 6.7% and the cost of sales also had increase in line with the revenue in 2016. Gross profit of the business had increased by 4.2% or Rs 161 million in 2016 and it is also in line with the growth in the revenue.

Gross profit margin of the business 23% in 2016 and 2015 and it did not change. Gross profit margin did not change since the growth in the cost of sales is 1.2% greater than the growth in the revenue. Operating profit of the business was Rs2.88 billion in 2016 and it was Rs2.6 billion in 2015. The operating profit had increased by 9.3 % or Rs 243 million. Rs38mn increased in the other income and Rs56 million decreased in the other expenses led to increase the operating profit by 9.3%. Net profit of the business was Rs2.5 Billion in 2016 and it was Rs2.43 billion in 2015. The Net profit margin in 2016 was 14.4% and it was 14% in 2015 and there were no any significant variance in net profit of the business. Finance income had been decreased by 12% and this indicates that business had cash flow problems to invest in the interest and dividend income generating sources. Further, interest cover of the Access Engineering PLC had decreased to 7.8 times from 29.79. This indirectly says that the business had obtained loans from the banks and other financial institutes to finance their construction projects as a result of that their finance expense had increased significantly. Finance cost of the Access Engineering PLC was Rs 368 million in 2016 and it was Rs 88 million in 2015. The finance cost had been increased by Rs 280.2 billion. Earnings per share had been improved to Rs2.47 per share from Rs2.35 per share in 2016.

Financial Position at Access Engineering PLC

The current asset ratio assess the firm’s ability to settle the short term of loans of the business. In other words, it measures the number of current assets to settle the current liabilities of that particular business. It is normally acceptable to have 2 current assets to settle one current liabilities. In the case of Access Engineering PLC, the current asset ratio of the business was 2.67 in 2016 and it was 2.57 in 2015. The current asset ratio of the business is healthy as it is more than the accepted level in the industry. This indicates that the Access Engineering PLC have more than 2 current assets to settle its one current liability.

Gearing ratio measure the how the company developed its capital structure. The capital can be raised from the equity sources and the debt sources. If the company include more debt portion in the capital that will increase the finance cost of the business and decrease the profitability. However, the interest costs are deductible for the tax purposes. Further, if they introduce more equity sources in the capital structure the business need to pay dividends for the shareholders or investors and they will have the ownership. Ownership will dilute the control and dividend will create additional tax burden on the business. The gearing ratio of the Access Engineering PLC was 31% in 2016 and it was 3% in the 2015. The Access Engineering PLC had obtained more loans from the Banks to finance the construction projects which are undertaken by Access Engineering PLC. The gearing ratio the Access Engineering PLC had increased by 28% since the Access Engineering PLC had obtained Rs5.1 billion in 2016 and the increase in the loans was mainly to finance the projects. 31% of the gearing will not create going concern or survival issues for the business and the gearing level of the business acceptable in the industry. Net asset per share was 17.46 in 2016 and it was 16.27 in 2015. It has improved marginally in 2016.

Drake Scull International Financial performance and the financial Position Analysis.

Drake Scull International actively operates in the Middle East market and it is one of the well-known construction business organizations in Middle East region. Following picture shows the profitability of the business during the year ended 2015 and 2016.

The Contract revenue of the business in 2016 was Rs 3.2 mn and it was Rs 4.1 mn in 2015. The contract revenue had declined by 22% in 2016. The main reason for the decline in the contract revenue is the decrease in the demand for the projects in the Middle East region due to the abnormal political and economic climate which prevailed in that particular region in last few years.

Drop in the demand for Oil products was one of the important reasons for the economic recession faced by the countries in the Middle East region. Since Iran start to supply the Oil products to the world market at a competitive price and as a result of that Middle East countries faced in gaining their usual demand for their products in the market. This decrease the purchasing power of the business and the individuals of people who live in those countries. As a consequence of that, the overall savings and the investment had decreased significantly in those countries in the Middle East region. Due to these factors, investors in the Middle East countries had to cut their investment on the capital products and due to that they did not invest in any new projects or they decrease the investment on the existing projects. These economic factors had significantly impacted the profitability of the business by decreasing the demand for the projects. Further, cost of sales of the business was AED 3.6 mn in 2016 and it AED Rs 4.6 mn in 2015. The decline in the cost of sales was in line with the decline in the revenue. The gross loss of the Drake Scull International was AED 441mn in 2015 and it was AED 364 Mn in 2016. The Gross loss margin of the business was 11% in 2016 and it was 11% in 2015. The decline in the gross loss was mainly due to the decrease in the demand for the construction projects in the industry. The decline in the demand led to decrease the contract revenue of the business significantly and as a consequence of that the business had experienced gross loss in the both year.

Other income of the business also had decreased by 52% (AED 39mn) during the year ended 31st March 2016 and this was also an outcome of the economic recession which was experienced by the countries in the Middle East countries. It can be observed that the general administration expenses of the business had decreased by 22%. The business had decreased it additional overhead cost of operation and reduce its work force by considerable amount during the 2015/16 financial year to survive and be competitive in the industry during the economic recession phase.

Drake Scull International had making operational losses in 2016 and 2015. The operation loss of the business was AED 739 million in 2016 and it was AED 903 in 2015. Operating loss had decreased by AED 160 million during the 2015/16 financial year. The operating loss of the business was 23% of the total sales in 2016 and it was 21% in 2015.

The main reason for the decline in the operating loss is 22% decrease in the general administration expense of the business during the financial year. Finance income is the additional income that the business generate by investing in the profitable projects. When the business has the excess or surplus cash reserves, the business invest in the profitable projects in order to generate returns. The finance income of the Drake Scull International had been decreased substantially during the year ended 31st March 2016.

Finance income of the business was AED 8 million and it had decreased to AED 0.3 Million during the year ended 31st March 2016. Main reason for this was the lack of cash flow due to unavailability of big construction projects in the market. Since the business did not have sufficient cash flows to operate the business, they had to withdraw significant portion of the investments as a result of that interest income and the investment income of the business had decreased significantly. Further, due to the liquidity issues the business had to obtain loans from financial organisations and as a result of that the finance cost of the business increased by considerable amount. Finance cost of the business had increased by 25% during the year ended 31st March 2016. Finally, due to the above mentioned factors the business had mad losses in the both 2015 and 2016.

Financial Position of Drake Scull International

The financial position of the business can be analyzed in terms of the business’ ability to pay its short-term debt and long term debt. The author use current asset ratio to assess the short term loan repaying ability of the business and the author use gearing ratio to assess the long term debt repaying ability of the business or potential going concern issues of the Drake Scull International.

Current asset ratio of the business seems very low at Drake Scull International when compare with the similar firms in the industry. Current asset ratio of the business was 0.9 in 2015 and it was 0.87 in 2016. In other words, Drake Scull International had 0.9 current assets to settle one current liability of them in 2015 and they had 0.87 current assets to settle one current liability in 2016. According to the industry norm, the business should have minimum 2 current assets to settle one current liability in the business.

Drake Scull International should find ways to generate cash flows to the business and settle their current liability and should improve the current asset level of the business. When compare with Access Engineering PLC, Drake Scull International have serious liquidity problem and this is mainly due to the abnormal economic climate in the Middle East countries. We can reasonably assume that after the recession the business will be able to find new contracts and can increase the cash flow to the business and these will eradicate the liquidity problem in the business.

The business had to obtain long term loans from the banks in order for them to survive and be competitive in the market. The total long term debt obtained by the business was AED 221 million in 2015 and it increased to AED 368 million in 2016. Further, the equity balance had decreased almost by 1 billion AED in 2015/16 financial year. Decrease in the equity shares or equity balance indicates that the investors had lost their confidence on the industry after the economic recession and the abnormal economic climates in the Middle East. The gearing ratio of the Dark Scull International was 30% in 2016 and it was 10% in 2015. The gearing ratio had been increased by 20% and if they increase the debt portion in the capital structure that will increase the risk of survival or going concern issues in the business in long term.

000′000′
Number of shares in issue2,506,3592,625,569
Loss per Share AED(0.320)(0.360)

It can be noticed that the number of share had decreased and the business still could not have the positive earnings per share due to the abnormal economic factors in the industry.

Strategy Analysis of the Business

To increase company’s market share

The businesses need to promote the corporate brand among the customers and the general public. When we take construction industry, customer prefer to have the service of well-established business organisation. Since to construct a building or apartment or any types of physical asset it will require considerable amount of investment and the people wish to use them for long time.

Therefore, they will go with quality and reputed service providers who are in the industry. Therefore, it is important to communicate the positives to the target customers and position the business strongly in the consumers mind. In addition to that, the both business mentioned above should consider to the revise their pricing strategies to attract more individual and institutional customers to enhance the sales. Further, it is important to enhance the quality of the output they produce or building or road they develop. Further, the business should develop strong network or close relationship with the private sector and government sector. These will help them to win new business contracts and as a result of the new business contracts they will be able to enhance the market share.

To manage the dual issues of increasing capital and maintaining a healthy cash flow

It is important to have sufficient cash flows in the business and the meantime the business should have appropriate level of capital in the business. The business should maintain proper balance between capital and the cash flow of the business.

To develop an effective supply

The business should understand the nature of raw materials which they require to perform the services and who are the connected parties in supplying raw materials and intermediaries for the business to perform its services. It is important to maintain a proper supply chain since properly maintained supply chain can deliver value additions to the business organisation. The raw material suppliers, sub-contractors, managers and the promoters are key members of the supply chain in a construction industry. It is important to have reliable and flexible raw material suppliers to ensure smooth operation of the business. Further, the business should negotiate and agreed on a reasonable price for the materials to enhance the profitability of the business. The business should explain the quality standards that they expect from the products to the subcontractors and the other key workers of the business and in addition to that, the business need to find efficient and economic subcontractors to enhance the overall efficiency of the business.

To create a company level bidding strategy for construction projects

The company should understand the business environment in detail prior to they make decisions or strategies related to bidding for construction projects. They should understand the nature of the customers and their expectation for their suppliers or service providers. In addition to that the business should understand the market price or industry price for the construction projects. Further, the business should estimate the resources availability in the business and the capability of the resources of the business or strengths & weaknesses of the business resources. In addition to that, they should accurately estimate the total anticipated cost which will incurred to complete the project after understanding the nature of the projects.

If the required budget is beyond the limit of the business, business should try to arrange the finance from financial institutions at a reasonable rate. After considering all these, business should set a completive price which reflect the quality of the product and which bring competitive edge to the business in the market place.

Business Risk

Business risk is the probability that a company will experience a lower profit than it expected due to the changes in the business macro environment factors. When we take the construction industry, it is vulnerable to the adverse changes in the macro environment changes. A change in the economic or political or legal environment factor can create going concern issues for the business like Access Engineering PLC or Drake & Scull International. For instance, the change in the government can stopped the projects which initiated and executed by the ex-government. In which case the contractor of such project will face serious going concern issues in the market.

Reference

Ltdhttps://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=133903075

http://www.drakescull.com/internethome/AboutDSI

www.accessengsl.com/wp-content/uploads/2016/07/Annual-Report-2015-16.pdf

http://www.drakescull.com/internethome/annualreport