• D/G to SELL from Neutral, SOP-based TP remains at MYR0.26, 27% downside. We believe that Advancecon’s recent share price uptrend has outpaced the early stage of recovery for its fundamentals. It is trading at a steep 47x FY24F P/E, or >+2SD from the KLCON index’s 5-year mean, despite the absence of new mega projects – which justifies our SELL call. A rerating catalyst would be the faster-than-expected rollout of contracts from Sarawak, given its exposure in the Pan Borneo Highway (PBH) and road projects under the Upper Rajang Development Authority (URDA).

• Headwinds still remain. ADVC’s construction arm saw an improved PBT margin of c.6% in 1Q23 vs 2.5% in 1Q22, likely attributable to a low base effect as the country only transitioned into the endemic phase of COVID-19 from Apr 2022 onwards. Moreover, its quarry segment has been reporting losses since the completion of ADVC acquiring it in Dec 2021, and may likely continue to do so in light of intense competition.

• ADVC’s orderbook was worth MYR525.8m as at end-1Q23 (vs its record high of MYR845.4m as of end-FY18) with a 1.9x cover ratio vs the peer average of 4x. FY23 new job wins so far amount to c.MYR97.5m vs our FY23 job replenishment target of MYR250m. We estimate that its Sarawak jobs account for less than 5% of its total orderbook currently, vs c.29% as of end-Dec 2021. The last job secured in Sarawak by the group was in Feb 2022 – worth MYR5.6m (effective 30% share of MYR18.7m total value) and awarded by Petrofac related to the EPC of the Bintulu Additional Gas Sales Facilities 2. Hence, the rollout of jobs for the remaining phases of PBH would be crucial to replenish its orders from East Malaysia. Other projects that ADVC is involved in such as the West Coast Expressway (WCE) are expected to be completed in 2025 (current progress: c.85%).

• 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 – in contrast to its peers such as Econpile (ECON MK, SELL, TP: MYR0.14) and Pintaras Jaya (PINT MK, BUY, TP: 1.94) which have been previously involved in MRT-related works. Therefore, near-term earnings visibility is only backed by East Coast Rail Link and WCE jobs that cumulatively contribute more than 50% of its orderbook, based on our estimates. As such, we advocate investors to cash in on the rich valuation, as there may not be new large infrastructure projects making a debut that soon. An additional catalyst could be it securing more jobs related to the property development and industrial buildings.

• We make no changes to our earnings estimates. As such, our SOP- derived TP of MYR0.26 remains put, after ascribing a 2% ESG discount based on our in-house ESG scoring methodology. While there should be growth in FY23-25F, we think that it will take time before ADVC’s net profit reaches pre-pandemic levels of MYR11-18m.

• Key upside risks include shorter-than-expected delays in project rollouts and a larger-than-expected value of contracts awarded.

Source: RHB Research - 4 Jul 2023