Performance evaluation of two construction companies


Performance evaluation of two construction companies

Word count 4786


1. Select two listed construction companies, one each from Sri Lanka and the Middle East. Analyze current performances of these companies. You are required to consider the following aspects when analyzing company performance: share price, capital, turnover, profit margin, gearing, portfolio of projects.

2. Present an argued strategy that addresses the following strategic directions within the scenario given for each company.

a. To increase company’s market share (Percentage of total industry value captured)
b. To manage the dual issues of increasing capital and maintaining a healthy cash flow
c. To develop an effective supply chain (company level, sub-contractor level, and project management level)
d. To create a company level bidding strategy for construction projects (criteria for selecting projects: Scale, required margins, possibility of strategic alliances, complexity of projects and associated risk)

3. Present one theory of risk and consider each company’s risk position using that theory.

Additional information


1.0 Introduction

This report will be analyzed the current performance of the two construction companies based on financial and operation perspectives. Further this will be discussed on current issues and risks which are faced by two companies and the strategic directions based on varies scenarios. One company is Access Engineering PLC which is established in Sri Lanka. Other one is Orascom construction Limited which is operated in Middle East and North Africa.

1.1 Access Engineering PLC

Access Engineering PLC (AEL) is one of Sri Lankan most prominent company in the civil engineering and construction industry. The company was established in 2001 and listed in Colombo stock exchange as a public limited liability company. Except for the construction sector, Access Engineering PLC extend its operation in property and automobile sectors too. Access Engineering PLC is recognized as a “specialist contactor” by the National Construction Association of Sri Lanka and as a “major contractor” by Construction Industry Development Authority (CIDA). The company obtained many international accreditations and memberships related to construction industry. ISO 9001.2008 accreditation for quality management system, ISO 14001.2004 for environment management system and ISO 18001.2007 for health and safety management system are few of them. Access Engineering has won many awards in a various categories such as “Best corporate citizen sustainability award (construction sector)”, “Chartered Accountants annual report awards (Silver – construction sector)”, “National award for construction performance for road sector and bridge sector” and “National award for construction excellence for building sector” in 2016.
AEL currently conduct their operations in sectors like roads and highways, bridges and flyovers, water and waste water, harbors and maritime work, irrigation and land drainage, pilling and building. The company has delivered the services for both public and private sector but mainly their infrastructure operations are driven through public sector projects.
Since 2002, Access Engineering has been conducted various road and highway development projects throughout Sri Lanka. Initially AEL has been conducted small scale road construction projects which are project value less than Rs 500 mn. Then the company has been shifted to the medium scale projects which are project value is in between Rs 1000 to 3000mn. Now there are two ongoing large scale projects which are project value is more than Rs 5000mn. When it comes to bridges and flyover sector, AEL mainly conducted projects which are project value less than Rs 1000 mn. In water and waste water sector, company has been conducted small, medium and large scale projects in the past. There is a small scale, medium scale and a large scale project within ongoing water management projects respectively projects values are Rs 647mn, 1615mn and Rs 4,700mn. Access Engineering PLC has been shifted to building construction sector after 2011. Then AEL has been completed many small and medium scale building construction projects. However currently there are few large scale housing projects are going on. Some of these building projects are categorized under less taller constructions and still AEL is new for the skyscrapers and luxury apartment sector which has rapid development in Sri Lanka.
AEL achieved revenue of Rs 20.4 Bn in 2016/17 financial year, operating profit reached to Rs 3.35 Bn and profit after tax has been recorded as Rs 2.74 Bn in 2016/17. Operating profit margin and net profit margin has been recorded as 16.4% and 13.4% respectively. Access Engineering PLC current share price is being moved around Rs 26.00 therefore current market capitalization is around Rs 26 Bn.
Scarcity of skilled labors is one of serious challenge which is common for the construction industry of Sri Lanka. Possibility of reducing market share and margins due to high level of competition is also major challenge. Many local and international construction companies are operating in Sri Lanka and there is a growing rivalry within these companies for large scale project. Increasing interest rate is negatively impacted on companies’ cost of funding. On the other hand mitigating environmental impact of operations is main thing that Sri Lankan construction companies need to look at.

1.2 Orascom Construction Limited

Orascom Construction Limited which was established in 1950 is a global engineering and construction contractor mainly focused on infrastructure, industrial and high end commercial projects in North America, Middle East and United States. OCL is listed on NASDAQ Dubai and the Egyptian Exchange (EGX). OCL has been recorded USD 4.0 bn revenue in financial year 2016. OCL has more than 70,000 employee base and has been executed its operation throughout 10 countries. The group operates through three separate brands; Orascom Construction (OC) and Contrack Watts two 100% owned companies of OCL and the Weitz company which is joined venture with Belgium based BESIX Group. OCL is ranked as 5th in Top 10 Industrial Contractors List and 32nd place in Top 250 International Contractors List in 2016.
OCL maintains its higher position as a leading contractor in Middle East and North America throughout the infrastructure, industrial and high end commercial sectors. However mainly, Orascom Construction has been conducted commercial sector projects in Middle East region with the association of BESIX. The group pro forma backlog is USD 6.8 Bn as at 31st December 2016 and consolidated backlog is USD 5.3 Bn. In 2016 OCL has been awarded USD 3.8 Bn new projects in Egypt, Algeria and USA.
OCL achieved consolidated revenue of USD 4.003 Bn in financial year 2016. Operating profit has been recorded as USD 44 mn and net profit reached to US 53 mn. Operating profit margin and net profit margin has been recorded as 1.09% and 1.3% respectively. BESIX contribution is helped to the group make a profit in financial year 2016. Last year OCL has been recorded USD 334 Mn net loss. OCL current share price is deferred in between USD 6.00 – 6.50 in NASDAQ Dubai. Current market capitalization is around USD 735 Mn.
According past financial records, OCL was not performed well in financial aspects. Biggest challenge that Middle East construction sector is faced in last two years is reduced liquidity as a result of low oil price. Specially in Middle East, ability to fund construction projects is depended on oil and gas prices. Since oil price reduction in last two years, government try to control the some construction projects specially high profile projects. Scarcity of skilled employees is another challenge and this can be a bigger issue with new regulation changes. Project cost is subject to change based on cost of procurement, raw material cost and foreign exchange rate.