Avanceon Ltd (AVN) is expected to post a consolidated NPAT of PKR327mn (EPS: PKR1.27) for 1QCY22, up 34% yoy but down 65% qoq. Key expectations behind the jump in yoy earnings are (i) realization of revenue from last year contracts which AVN had been unable to fulfill in 2HCY21, coupled with initiation of new orders, and (ii) exchange gains due to PKR devaluation. However, on a sequential basis, the topline and earnings of the company are expected to decline significantly as bulk of the contracts are realized in the last two quarters of the year. Most of AVN’s orders last about 12-15 months and it realizes revenues according to percentage of completion method.
Key expectations for 1QCY22 results:
Net sales are expected to rise 37% yoy but will decline 50% qoq to PKR1.8bn. The yoy jump is majorly attributable to the acquisition of new orders and the backlog of last year's orders which the company was unable to fulfill in 2HCY21.
We expect gross margins to decline by 6.4ppt yoy and 5.1ppt qoq to 29.8%. The decline in GMs is majorly due to extensive planning and understanding in the initial stages of the orders. To note, the planning stage initially incurs more costs than revenues.
Other income is expected to clock in at PKR129mn vs. PKR51mn in 1QCY21, where the yoy increase is likely to emanate from higher exchange gains as PKR depreciated c.1% during 1Q vs. appreciation of c.1% in SPLY.
Among other line items (i) Finance cost is projected to double yoy to PKR44mn, albeit from a low base (ii) Admin expenses will increase by 10% yoy to PKR169mn, and (iii) effective tax rate is likely to clock in at 5.2% vs 6.1% in 1QCY21.
AVN is likely to post decent earnings on a yoy basis in 1QCY22, led by strong acquisition of new orders, coupled with the completion of the previous year’s orders. Going forward, the consolidated earnings of the company are expected to rise sharply as Octopus’ new services become fully operational. We have a Buy rating on AVN with a TP of PKR176/sh.