Advancecon to gain from solar energy venture


ADVANCECON Holdings Bhd’s venture into the solar energy business is expected to provide a recurring income stream that will complement its core business and civil engineering unit.

RHB Investment Bank Bhd analysts Muhammad Danial Abd Razak and Eddy Do Wey Qing in a note yesterday stated that Advancecon’s recent large-scale solar (LSS) win has the potential to boost net profit by 13% in the financial year 2024 (FY24).

The investment bank has initiated coverage on Advancecon with a ‘Buy’ call and a sum-of-parts-based target price (TP) of 54 sen, representing a 32% upside and a circa 2.5% FY21 forecast (FY21F) yield.

“We partly derived our TP by pegging FY22F earnings per share to 12 times price-to-earnings ratio. The multiple represents its five-year mean baseline, which is warranted.

“Its earnings are rebounding to pre-pandemic levels, it has a healthy replenishment rate assumption of RM300 million and RM350 million per year for FY21F and FY22F, and its net profit margin is growing,” the report read.

The analysts expect Advancecon to regain strength and return to optimal machine utilisation rates of 80%-90% in FY21 driven by its orderbook growth.

Advancecon emerged as the biggest winner of East Coast Rail Link (ECRL) contracts in 2020-2021F, clinching RM185 million worth of work packages.

Contract flows from ECRL have started to show momentum since May 2020, which resulted in Advancecon clinching a total of five advance work packages totalling RM185 million. The value forms 21% of the company’s current outstanding orderbook.

According to management, about 60% of tenders comprise packages for ECRL.

The new jobs are expected to enhance billing to existing works for the West Coast Expressway (WCE), which came up to circa 42% of unbilled orders as of Dec 31, 2020, while issues related to WCE’s land acquisition have been resolved.

Prospects for new orders are also positive, which could add to its 17 projects already ongoing, the analysts said.

“Advancecon’s toehold in this segment should enable it to be ahead of peers, which may lead to more new job wins. Its arsenal of equipment (587 units) and in house maintenance team also ensure it remains competitive,” they noted.

Advancencon allocates a capital expenditure of around RM15 million to RM20 million each year to expand their equipment size, which is viewed positively, as this would help reduce its need for subcontractors.

Downside risks to the outlook on Advancecon include a failure to secure new contracts, a prolonged downturn in the retail and property markets and a longer than expected delay in the rollout of mega infrastructure projects.