AEL reported a marginal decline in earnings for 1QFY15, -2% YoY to Rs. 544.6mn, as higher revenues (+7% YoY) and associate income (from its stake in ZPMC Lanka Company (Pvt) Ltd) were offset by 1) a drop in net finance income (attributable mainly to the lower interest rate environment); and 2) a slight contraction in operating margin (stemming from a sharp rise in admin expenses coupled with lower other income). However, we believe the company is on-track to achieve our full year earnings projection of Rs. 3.4bn for FY15E, with an expected increase in revenue recognition for the core construction business during 3QFY15-4QFY15.
We also maintain a positive view on the longer term outlook for AEL, given visibility of a robust order book and pipeline totalling ~Rs. 83bn over FY15E-17E. While the road sector still accounts for a large share of the company’s order book, AEL plans to gradually increase exposure to power and township development through PPPs (Public-Private Partnerships), in which asset ownership would be retained by the public sector, while funding/construction would be carried out by AEL. The stock currently trades at a FY15E P/E multiple of 8.0x at a 39% discount to the market.
John Keells Stock Brokers (Pvt) Ltd.