Avanceon Ltd (AVN) has posted a consolidated NPAT of PKR360mn (fully diluted EPS: PKR1.11) for 1QCY22, up 47% yoy but down 62% qoq. The result beats our expected EPS of PKR1.01, higher GMs and other income. However, on a sequential basis, the topline and earnings of the company have declined 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 result highlights for 1QCY22:
Net sales have risen by 4% yoy but declined by 62% qoq to PKR1.3bn. Sales have come in significantly lower than our expectation of PKR1.7bn.
Gross margins increased by 5.0ppt qoq but declined by 1.3ppt yoy to 34.9%. GMs came in higher than our expectation of 29.9%. The qoq decline in GMs is majorly due to extensive planning in the initial stages of the orders. To note, the planning stage initially incurs more costs than revenues.
Other income has clocked in at PKR180mn vs. PKR51mn in 1QCY21, where the yoy increase is likely to have emanated from higher exchange gains, as the PKR depreciated by c.1% in 1Q (against c.1% appreciation in 1QCY21). AVN has booked higher other income, against our expectations, courtesy of higher exchange gains.
Among other line items (i) Finance cost has increased by 120% yoy to PKR46mn, albeit from a low base, (ii) Admin expenses increased by 44% yoy to PKR221mn, and (iii) effective tax rate clocked in at 4.1% vs 5.8% in 1QCY21.
Although AVN’s profitability has increased sharply on a yoy basis, revenue increased by an unimpressive 4% yoy. The latter is in contrast to our expectation of acquisition of new orders, coupled with the completion of the previous year’s orders. Going forward, the consolidated topline and earnings of the company are expected to rise sharply as its subsidiary Octopus’ new services become fully operational. We have a Buy rating on AVN.