• Keep NEUTRAL with new MYR0.26 SOP-based TP (from MYR0.24) with 0% downside. Advancecon recorded a 1Q23 core net loss of MYR4m vs our full-year earnings estimates of MYR2m – mainly due to ongoing 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 Pan Borneo Highway and Upper Rajang Development Authority (URDA) road projects.

• Quarry segment continues to drag. ADVC recorded a 7% YoY jump in revenue in 1Q23 amid better progress of construction jobs, which led to a >10% PBT growth for the construction arm in the quarter. Meanwhile, its quarry segment still reported a loss before tax (LBT), albeit at a lower scale of MYR1.7m (after excluding one-off professional fee for Gurun land disposal) in 1Q23 (1Q22 LBT: MYR3m) as competition remained intense.

• Orderbook. ADVC outstanding orderbook stands at MYR525.8m as at end 1Q23 (end 1Q22: MYR624m) with a 1.3x cover ratio vs peer average of 3x. FY23 new job wins so far amount to c.MYR90m vs our FY23 contract replenishment target of MYR250m. Since ADVC does not have any prior experience in Mass Rapid Transit (MRT) 1 and 2, it is hard to gauge if the group is looking to participate in MRT3 as a subcontractor. Nevertheless, it may submit bids for projects related to 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 previous year.

• While earnings missed expectations, we make no changes to our earnings estimates as we believe that progress billings of ongoing jobs may accelerate in the coming quarters. Nevertheless, we are rolling forward our valuation base to FY24 from FY23. Hence, we arrive at new SOP-derived TP of MYR0.26 (from MYR0.24) after ascribing a 2% ESG discount based on our in-house ESG methodology.

• 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 MYR152m. While there is growth in FY23-25F, we think that it will take time to reach pre-pandemic earnings level of MYR11-18m. Key downside risks include a failure to secure contracts and longer-than- expected delays in project rollouts. The opposite represents upside risks.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 25 May 2023