• D/G NEUTRAL from Buy, new MYR0.28 TP (SOP) from MYR0.34, 0% upside, 1% yield. Advancecon booked a 1H22 core net loss of MYR1.9m (our initial full-year estimate: MYR7m) – mainly on higher cost of sales and quarry segment losses. Despite the recent softening in input prices (eg steel bars), prices are likely to remain above pre-pandemic levels, exerting bottomline pressure. The only positive: 4-year extension for the power purchase agreement (PPA) for its Large Scale Solar 4 (LSS4) project, but profits will only be seen in the next six years or so based on our estimates.

• Quarry unit continues to drag. ADVC posted a 63% YoY jump in 1H22 revenue amid the consolidation of Spring Energy Resources’ (SER) topline. But, the consolidation of SER’s MYR8.1m loss partly led to ADVC’s 1H22 core net loss of MYR1.9m (1H21 net loss: MYR2m). Major factors: i) Slower demand and ii) compressed selling prices due to competition. Other causes: Increased production costs due to global inflation and the higher minimum wage. Higher finance costs – in light of higher interest rates – also weighed on the quarry segment’s performance. This raises concerns regarding the PAT guarantee of MYR6m by SER over 24 months (FY22-23).

• Orderbook. ADVC’s outstanding orderbook stands at MYR561m, representing an orderbook/revenue cover ratio of c.2.1x. YTD job wins amount to MYR75m vs our replenishment target of MYR250m. The latest contract award was the provision of earthworks for KEB Builders, which we believe is for the West Coast Expressway. Since ADVC does not have any prior experience in Mass Rapid Transit (MRT) Lines 1 and 2, it is hard to gauge if it is looking to participate in MRT3 as a subcontractor.

• Earnings estimates and valuation. As result missed expectations, we are toning down our FY22F-24F earnings by >50% to pencil in more conservative margins assumptions amidst the high raw material prices and higher finance costs. Our 8x target P/E ascribed to the construction segment represents a 35% discount to the KLCON Index’s forward P/E, which is justified, given ADVC’s smaller market capitalisation of MYR140m. Post the earnings adjustment, we derive a new TP of MYR0.28 after ascribing a 4% ESG discount based on our in-house ESG methodology. This also incorporates the net effect from adjusting our DCF valuation for LSS4, which was extended by four years. Valuations are justified, with the stock trading at +1SD from its 5-year mean. While there is growth in the FY23F-24F numbers, we believe it will take time to reach pre-pandemic earnings levels of MYR11-18m.

• Key downside risks include a failure to secure new contracts, cost overruns, and longer-than-expected delays in the rollout of infrastructure project packages. Key upside risks include winning news contracts, better cost management, and faster-than-expect delays in the rollout of infrastructure packages.

Source: RHB Research - 25 Aug 2022