Via its IPO, Advancecon Holdings Bhd (ADVCON) will be raising RM56.7m with a market capitalisation of RM253m. Current outstanding order-book is at healthy level of RM572m providing visibility for the next 2 years. We expect more contract wins from the infrastructure space as ADVCON is targeting larger contracts of above RM50m and mobilizing more machineries into East Malaysia to tap opportunities there starting with the Pan Borneo project. SUBSCRIBE with a TP of RM0.85 based on 10x FY18 PER.

IPO to raise RM56.7m based on 90m new shares at IPO price of RM0.63. The enlarged share capital of 402.1m shares indicates a market capitalization of RM253.3m. Utilization of proceeds is mainly on machinery capex, construction of a new workshop, debt repayments and working capital requirements. Major shareholders include Dato Phum Ang Kia (23.7%), Lim Swee Chai (12.7%) and Pham Soon Kok (7.3%).

Earthworks specialist with reputable clients. Being 27 years in the earthworks space, ADVCON has a proven track record of hundreds of completed jobs under their belt. Most jobs accepted by ADVCON for the past 3 years were from recommendations/invitations except for the WCE package and Kota Puteri project (Rawang) whereby it was won through open tender. ADVCON has gained a set of reputable clients as their recurring clients namely SPSETIA and ECOWLD along the years. While we believe that the execution of earth and road works is relatively simpler compared to building works, we note that it is still not easy to breach the barrier to be a specialized earthworks contractor capable to take on large projects given the amount of CAPEX required. Due to ADVCON’s experienced management team coupled with the extensive range of machineries, ADVCON has emerged as one of the biggest earthworks contractors within this relatively fragmented earthworks space in Malaysia.

Less affected by slowdown in Malaysian property market. We believe that ADVCON which specializes in earthworks are less affected by the slowdown in the property development space as they could still actively bid within the infrastructure space with clearer replenishment visibility with impending jobs such as HSR, ECRL, SUKE, DASH and Pan Borneo.

Earnings forecast. We are forecasting FY17-18E CNPs of RM32.1- 35.0m on the back of: (i) outstanding order-book of RM572m as of 19th May 2017, and (ii) order-book replenishment target of RM250-300m for FY17-18E with a remainder of RM216m to be achieved for the remainder of FY17. We highlight that ADVCON’s FY17-18E net margins of 11% and 2 year fwd CAGR earnings growth of 15% is superior against peers average FY17-18E net margins of 9.6% and 2 year CAGR growth of 9% respectively. That said, we note that our expected FY17-18E net gearing of 0.3x-0.2x remains inferior to peers.

SUBSCRIBE with a TP of RM0.85 based on 10x FY18 PER. Despite the slight discount over peers’ average PER of 11x, we believe our applied 10.0x PER valuation is fair given the ADVCON’s market cap which remains much smaller against peers coupled with their higher net gearing. Nonetheless, we note that their above average PAT margins of 11% along with FY17-18E earnings growth of 21%-9% (implying 2-year Fwd. CAGR of 15%) provides a buffer for their shortcomings. We like to highlight that ADVCON IPO price of RM0.63 implies Fwd. FY18 PER of 7.2x – which is a very attractive level versus peers’ current trading range of 8.9-12.5x.

Source: Kenanga Research - 28 Jun 2017