• Keep NEUTRAL, new MYR0.24 SOP-based TP from MYR0.28, 2% downside. Advancecon recorded a FY22 core net loss of MYR0.2m vs our full-year earnings estimate of MYR0.7m, mainly due to losses from the quarry segment. We expect losses from the quarry segment to continue, albeit at a smaller scale as the market normalises. A rerating catalyst includes securing more contracts from Sarawak – given its exposure in the Pan Borneo Highway and road projects under the Upper Rajang Development Authority (URDA).

• Quarry segment continues to drag. ADVC recorded a 56% YoY jump in revenue in 4Q22 amid the consolidation of Spring Energy Resources (SER), which made up 41% of the total revenue. However, the construction arm recorded a pre-tax loss of MYR12.7m in 4Q22 (4Q21 PBT: MYR1.9m), mainly attributable to manpower constraints and project terminations. In addition, the quarry division reported an LBT of MYR11.4m in 4Q22 (3Q22 LBT: MYR3.1m) despite seeing a >10% YoY growth in the sales of premix and quarry products in 4Q22. Major factors for SER’s losses were likely from compressed selling prices, which in turn were due to competition.

• Orderbook. ADVC’s outstanding orderbook stands at MYR474.6m as at end-FY22 (end-FY21: MYR648.9m), representing an orderbook/revenue cover ratio of c.1.7x. FY22 job wins amount to MYR162m vs FY21’s contract replenishment worth MYR289.4m, with the latest contract award being the provision of earthworks for KEB Builders – which we believe is for the West Coast Expressway in Dec 2022 worth MYR86.7m. Since ADVC does not have any prior experience in Mass Rapid Transit (MRT) 1 and 2, it is hard to gauge if they are looking into participating in MRT3 as a subcontractor. Nevertheless, the group may submit bids for projects related to the Sarawak roads and the East Coast Rail Link (ECRL). We estimate that approximately 20% of ADVC’s current orderbook is made up of Sarawak-related projects, with the state receiving a higher allocation of MYR5.6bn under the re-tabled Budget 2023 vs MYR4.6bn in the year before.

• As earnings we below expectations, we reduce FY23-24F earnings by 10-13% as we dial down on our margin assumptions. We also introduce FY25 forecasts, which build in a job replenishment target of MYR350m. Our unchanged 8x target P/E ascribed to the construction segment represents a c.30% discount to the Bursa Malaysia Construction Index’s 5-year mean P/E – which is justified, given ADVC’s smaller market capitalisation of MYR123m. As a result, we arrive at a new SOP-derived TP of MYR0.24 after ascribing a 4% ESG discount based on our in-house ESG methodology. While there should be growth in FY23F, we think that it will take time to reach the pre-pandemic earnings range of MYR11-18m. Moreover, earnings from the power purchase agreement for its Large Scale Solar 4 (LSS4) project) is still minimal, at <1% of total revenue.

• Key risks include a failure to secure new contracts, cost overruns, and longer-than-expected delays in the rollout of infrastructure projects.

Source: RHB Research - 1 Mar 2023