• Maintain SELL with new MYR0.21 TP (from MYR0.24), 29% downside. FY23 core loss of MYR33.8m missed our estimate of MYR0.9m core earnings – mainly due to higher-than-expected material prices and cost overruns. In the absence of frequent jobs or sizeable job wins, we deem valuations to be lofty, with the stock trading at 55x FY24F P/E, which is >+2SD from its 5-year mean P/E and the Bursa Malaysia Construction Index – this justifies our SELL call.

• Results review. Although Advancecon’s FY23 revenue grew 6.5% YoY, its core net loss widened to MYR33.8m from MYR23.4m a year ago. This was mostly due to material cost escalation and cost overruns from the delayed completion of the West Coast Expressway (WCE) projects. The construction arm recorded a 4Q23 LBT of MYR26.4m (4Q22: -MYR12.7m) due to higher material prices, which squeezed project margins. The quarry segment continued to be in the red, with reported LBT of MYR15.9m in 4Q23 (4Q22 PBT: MYR6.6m) due to operating losses and tribute payments.

• ADVC’s outstanding orderbook of MYR330m at end FY23 (FY22: MYR475m) indicates a cover ratio of 0.7x. FY23 new job wins stood at c.MYR200m vs MYR162m a year ago, coming from a mix of infrastructure works for WCE and East Coast Rail Link (ECRL) projects as well as mixed development jobs from the private sector. We estimate the outstanding orderbook from Sarawak jobs to be <5% of the total orderbook, compared to c.29% as of end Dec 2021, with the latest job secured in Sarawak awarded by Petros Power in Aug 2023 worth MYR13.6m (30% share of MYR45.5m total value).

• Outlook. Given its prior experience in Sarawak, we believe the rollout of jobs in the state, such as the remaining phases of the Pan Borneo Highway (PBH) are crucial for ADVC to replenish its orderbook. However, we note that the size of PBH phase 2 is relatively small (88km) compared to phase 1 (786km). Also, given the absence of any prior experience in Mass Rapid Transit (MRT) and Light Rail Transit (LRT) projects, it is hard to gauge if ADVC is looking into participating in MRT3 and Penang LRT as a subcontractor. Therefore, medium- term earnings visibility is only backed by ECRL and WCE jobs, which contribute >30% of its outstanding orderbook, in our view.

• As earnings missed estimates, we slash FY24-26F earnings by 9-14% after factoring in more conservative margin and job replenishment assumptions. We also introduce our FY26F earnings of MYR6m, which pencils in a MYR320m job replenishment target. While we expect earnings growth to be underpinned by newly secured jobs, it will take time to reach pre-pandemic earnings levels of MYR11-18m. We cut ADVC’s ESG score to 2.6 from 2.9 due to the lack of emissions disclosures and community engagement to arrive at our new SOP- derived TP of MYR0.21, which incorporates an 8% ESG discount.

• Upside risks: Better-than-expected project rollouts and job replenishment.

Source: RHB Research - 29 Feb 2024