• Maintain SELL, new MYR0.24 TP from MYR0.23, 17% downside. Advancecon’s recent JV with Perak Corp (PRK MK, NR) to develop SilverValley Technology Park (SVTP) could lead to a new revenue stream. However, low construction progress billings and high material costs are still dragging its performance. With the continued underperformance, we believe its valuation is too lofty. The stock is trading at a 48x FY24F P/E, at >2SD from the 5-year historical mean – which justifies our SELL call.

• Foray into property development. ADVC’s indirect wholly owned subsidiary was appointed by Perak Corp as a JV partner to develop the SVTP industrial hub and sell completed industrial lots. This venture encompasses 39 pieces of leasehold land spanning 798.3 acres (net 530.7 acres) with an estimated GDV of MYR1bn. On its 65% stake in the JV, we derive a PAT of c.MYR0.5-1.5m pa during the initial stage of the development, based on our back-of-envelope calculation. Although we are positive on the JV project – as it introduces a new revenue stream and may bring potential construction opportunities for its engineering division – we remain cautious on the take-up rate of the project, as it is located in a relatively new area.

• Quarry business. ADVC acquired a 51% stake in Spring Energy Resources (SER) in 2021. Despite becoming the second-largest contributor to group revenue in FY22 (35%), it has been operating at a loss since then. This is due to the relatively low production with low business volume, increased costs and one-off professional expense incurred in relation to land disposals. Management guided that FY24 may bring about a turnaround as market demand on quarry products improve. Nonetheless, we remain relatively conservative on its profitability for the time being.

• ADVC’s outstanding orderbook is estimated to be c.MYR432m (1x cover ratio) – this includes two job wins from Sime Darby Property (SDPR MK, BUY, TP: MYR2.85) in 4Q23, and the latest construction contract worth MYR27.3m from Mujur Minat for Gamuda Gardens Park. Yet, its orderbook value has stayed below MYR600m for the past six quarters, vs a peak of MYR909m in 2QFY18. Potential rerating catalysts include: i) The company's ability to secure more East Coast Rail Link and West Coast Expressway jobs, as well as ii) a faster-than-expected rollout of Large-Scale Solar 5 or LSS5 projects, given its experience working on a power purchase agreement (26MW) with Tenaga Nasional (TNB MK, BUY, TP: MYR11.80).

• We slash FY23F earnings by c.60% on lower job billings and higher costs, and increase FY24-25F earnings by c.4-33% after factoring in the earnings stream from property development and minor adjustments on the quarry business. Our new SOP valuation incorporates the NPV of property developments, and 7x P/E for the quarry. As a net result, we arrive a new TP of MYR0.24 after ascribing a 2% ESG discount based on our in-house ESG scoring methodology. Key upside risks: Better than-expected project rollouts and job replenishment.

Source: RHB Research - 7 Feb 2024