State Bank’s LC approvals cast a shadow on Avanceon’s earnings
The publicly listed company’s PKR revenues grow to Rs4.6bn for 9-months of 2022 from Rs3.5 billion last year, but on the back of massive exchange rate gain of Rs1.64bn By Taimoor Hasan
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vanceon Limited, listed on the Pakistan Stock Exchange (PSX) with the symbol AVN, has posted a revenue of Rs4.6 billion for the nine months of 2022, up from Rs3.5 billion for the corresponding period of last year. The company posted a massive exchange rate gain of Rs1.64 billion because of rapid devaluation of rupee against the dollar, which increased the earnings in rupees but in dollar terms, the growth took a hit. Exchange rate gain last year was only Rs297.26 million. According to the company, revenue remained on the lower side in US dollars because the State Bank of Pakistan (SBP) had not granted LC approvals in last two quarters on foreign vendors which impacted Avanceon’s Pakistan business badly during the reported period. Meanwhile profit-after-tax (PAT) was Rs1.9 billion. Against last year, profit after tax was up from Rs751 million - an increase of 152.9 per cent. The last quarter of the year has mostly brought the highest amount of revenue for Avanceon. The company expects a $6 million (approximately Rs1.3 billion) shortfall in forecasted revenues for this financial year. However, profit after tax targets will likely be achieved with the help of exchange gain as a major contributor. The company expects to be entering fiscal year 2023 with $71 million backlog, the highest ever in Avanceon’s history, and claims to be on track to achieve its “Road to 100” plan. In its new business plan last year, Avanceon announced “The Road to 100” which is aimed at achieving target of $100 million core business revenues by fiscal year 2025. The board assigned $40 million as a revenue target to be collected from Saudi Arabia business, $40 million from the UAE segment and $20 million from Pakistan. Avanceon is the only listed company in Pakistan that offers industrial automation, electrical design, sterilization, project management, and consulting services, enjoying a near monopoly in this segment. It is the only listed company on the PSX to hold plenty of international affiliations and memberships. It is also one of the few companies that when they set a target actually go ahead and achieve it.
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In 2013, the company set out an ambitious five year plan to reach its revenue target of $50 million, called ‘Highway-50’. By 2018, the company had recorded a backlog of orders worth $56 million. Despite the pandemic, Avanceon’s business was not affected given a confirmed order backlog of $59 million for 2020, in which $55 million backlog is confirmed from business in the Middle East and $4 million from business in Pakistan. With such a track record, if the company is claiming that it will hit $100 million in revenue by 2025, it most likely will achieve that target. It is already expecting to enter 2023 with a $71 million order backlog. Avanceon’s competitive advantage is also that it has a presence in a diversified collection of segments, including oil and gas, FMCGs, Power, Chemical and Pharma. Clients include Saudi Aramco, Unilever, Nestle, Engro Fertilizers, Bayer, and Akzo Nobel. Even if one sector or client crumbles, Avanceon will be well protected. As for the dip in current performance, it is because of external factors beyond Avanceon’s control but should be picking up soon. “Going forward, as global interest rates peak, uncertainty around the macroeconomic environment is likely to settle and the Avanceon business should pick up,” says.Adnan Sami Sheikh, assistant vice president at Pak Kuwait Investment Company. “On the domestic front, easing in restrictions of LCs should bode well for revenue recognition,” he says. “Furthermore, since Avanceon has good business in Qatar, the football world cup in the final quarter can lead to bumper earnings as related projects would likely be completed.” According to Avanceon, its Qatar business segment performed exceptionally well during the nine months of 2022, which compensated group level revenue targets very well. On the bourse, Avanceon share price during the last nine months hovered between Rs96.36 in the beginning of January and Rs74.4 in the end of September, and reached a peak of Rs112.37 in February. The trading closed at Rs76.86 yesterday.
Octopus Digital
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n the other hand, Octopus Digital Limited (ODL), an Avanceon-owned subsidiary, posted a revenue of Rs575 million for the nine month period, up
marginally from Rs524.4 million for the same period last year. Octopus’ PAT for the period was Rs501.5 million, up 43% compared to the same period last year. Octopus Digital, which recently announced a merger with Dawood Hercules owned EmpiricAI which will be completed after regulatory approvals, is confident of achieving its set targets for the ongoing financial year. The companies, both Octopus Digital and EmpiricAI, are in the business of providing insights and business intelligence to industrial customers. After the completion of what should be called a merger, Dawood Hercules will get a certain percentage of shares in Octopus which is currently 80% owned by Avanceon and 20% is public shareholding. The company made its debut on the Pakistan Stock Exchange in September 2021 and quickly became one of the the biggest and a heavily subscribed IPO. Through the IPO, the company was able to raise over Rs30 billion against an ask of Rs1.2 billion, making the IPO oversubscribed 27 times. Since its IPO, publicly available financials show Octopus Digital has been abe to grow substantially though its revenues are still comparatively small. The company posted a revenue of Rs277 million in 2020 and a profit after tax of Rs219.7 million. For the year 2021, ODL posted a revenue of Rs625.1 million, a growth of 125%, and a profit after tax of Rs345.9 million, a growth of 57% over last year. For the first quarter of 2022, ODL posted revenue of Rs159.32 million and a profit after tax of Rs104.82 million. The revenue for the same quarter of 2021 was Rs51.6 million, and profit after tax of Rs9.6 million. For the half year ending on June 30, 2022, Octopus posted a revenue of Rs349.35 million and a profit after tax of Rs240.29 million. In 2021, the revenue of the company was Rs145.29 million and profit after tax was Rs66.3 million. According to ODL’s financial report for 2021, the company claims to have a healthy pipeline for 2022, which means further growth in revenue and profits can be expected. The company’s share price at the time of the listing was Rs43 and went upwards to reach Rs110 in January this year, in three months. It closed on Friday at Rs68.77. n
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