Avanceon Ltd (AVN) is expected to post consolidated NPAT of PKR759mn (EPS: PKR2.96) for 4QCY21, up 153% yoy and 4.9x qoq. Key expectations behind the massive jump in earnings are (i) higher backlog of orders, the revenues of which are expected to be booked completely in 4Q, and (ii) exchange gains due to PKR devaluation. Net profits in CY21 will thus sum to PKR1.4bn (EPS: PKR5.46), up 34% yoy. We assume that the company will announce a cash dividend of PKR1.0/sh along with a 20% bonus.
Key expectations for 4QCY21 results:
Net sales are expected to rise 26% yoy and 191% qoq to PKR3.5bn, which will mainly be led by revenue recognition from orders acquired at the start of the year and were expected to be completed by 4Q. Most of AVN’s orders last about 9-12 months and it realizes revenue according to percentage completion method. AVN typically realizes the bulk of the order in the last two quarters of the year.
We expect gross margins to increase by c.0.3ppt yoy and by c.4.0ppt qoq to 29.9%. The qoq increase in GMs is majorly due to greater services being provided in the later stages of a project (more planning and understanding in the initial stages of the order).
Other income is expected at PKR110mn vs. PKR98mn in 3QCY21, where the qoq increase will mainly emanate from exchange gains as PKR depreciated c.3% during 4Q. About 70% of the company’s revenues are exports.
Among other line items (i) finance cost is projected to rise by 50% yoy to PKR54mn, (ii) admin expenses will increase by 59% yoy to PKR315mn, which is majorly due to higher expenses being booked by its subsidiary Octopus in 4Q, and (iii) effective tax rate is likely to clock in at 4.5% vs 30.5% in 4QCY20.
AVN is likely to post decent earnings in 4QCY21, led by strong acquisition of new orders at the start of the year; the management guided that the company has backlog worth US$53mn for CY21. However, a lower-than-expected result will raise concerns on future growth of the company; and, upon a large deviation (miss), we will revisit our estimates to reflect that. Presently, we have a Buy rating on AVN with a TP of PKR232/sh.