Avanceon Limited – BR Research

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Avanceon Limited (PSX: AVN) was incorporated in Pakistan as a private limited company in 2003 and was converted into a public limited company in 2008. The company is principally engaged in the trading of products related to automation and control equipments as well as providing related technical services.

Pattern of Shareholding

As of December 31, 2022, AVN has a total of 324.7 million shares outstanding which are held by 11,202 shareholders. Directors, CEO, their spouse and minor children are the major stakeholders of AVN holding 71.24 percent shares. This is followed by local general public having a stake of 16.05 percent in AVN. Banks, DFIs and NBFIs have a representation of 4.58 percent in the outstanding share capital of the company while Modarabas and Mutual funds hold 3.33 percent shares. About 1.22 percent shares of AVN are also held by insurance companies. The remaining shares are held by other categories of shareholders having less than 1 percent stake in the company.

Historical Performance (2018-22)

AVN’s topline has been on the upswing in all the years under consideration particularly in 2023 where the company boasted the most staggering growth. The bottomline has also been registering phenomenal growth over the years except in 2020 and 2023 where it grew only marginally. The onus of tremendous bottonline growth is on “other income”. AVN’s other income is the reason why its operating and net profit margins are way above its gross profit margin in all the years under consideration. The GP margin of the company posted an uptick in 2019 and then followed a downward trajectory until 2022 once to bounce back in 2023. Conversely, its OP and NP margin rose in 2019 followed by a dip in 2020. Both the margins strongly rebounded in the subsequent years followed by a decline in 2023 (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.

In 2019, AVN’s topline ascended by 8.95 percent year-on-year on the back of export sales. Local sales slumped during the year despite 60 percent year-on-year growth in order generation. This was due to delays in some projects. However, that provided revenue inflows in the subsequent year. The company was able to cut down its cost by 5.22 percent year-on-year in 2019 which culminated into a 40 percent year-on-year rise in gross profit. GP margin also surged from 31.3 percent in 2018 to 40.2 percent in 2019. Operating expenses posted 6.95 percent year-on-year growth due to massive provision booked for expected credit losses from related parties and also because of contract assets written off during the year. Other income posted growth of 5.28 percent year-on-year in 2019 and stood at 35 percent of its topline. The main sources of other income were dividend income from subsidiary companies as well as exchange gain. On account of tremendous support which came in from other income, operating profit posted 28 percent year-on-year growth while OP margin rose to 54.5 percent in 2019 versus 46.4 percent in 2018. Finance cost grew by 85 percent year-on-year in 2019 on account of high discount rate, however, AVN being a low gearing company, didn’t take much impact of discount rate on its bottmline which grew by 33.36 percent year-on-year in 2019 to clock in at Rs.637.468 million with NP margin of 47.6 percent versus 38.85 percent in the previous year. EPS jumped from Rs.2.44 in 2018 to Rs.2.95 in 2019.

2020 brought in 15.42 percent year-on-year rise in the topline of AVN which came on the back of both local and export sales. Project revenue which includes hardware and software automation, efficiency solution as well as SCADA (supervisory, control and data acquisition) turned out to be the major growth contributor during the year. Cost of sales jacked up by 22.7 percent year-on-year due to installation charges and transfer of business to Octopus Digital Limited, a subsidiary of AVN. Gross profit grew by 4.61 percent year-on-year in 2020, however, GP margin shrank to 36.5 percent. Operating expenses posted notable decline of 42.72 percent year-on-year in 2020 as no provision for expected credit losses was booked during the year. Other income also slid by 8.63 percent year-on-year in 2020 due to a steep fall in exchange gain during the year. Operating profit posted 14 percent year-on-year growth in 2021; however, OP margin posted a marginal downtick to clock in at 53.9 percent. Despite posting a drop in 2020, other income was robust enough for AVN to post OP margin in excess of GP margin. Finance cost increased by 11.66 percent year-on-year in 2020 despite a drop in discount rate as the company availed Refinance Scheme by SBP for the payment of salaries and wages during the year and also obtained increased running finances during the year. The bottomline grew by 5.71 percent year-on-year in 2020 to clock in at Rs.673.839 million with NP margin of 43.5 percent. EPS clocked in at Rs.3.11 in 2020.

In 2021, AVN’s topline mustered 18.62 percent year-on-year growth. Local sales crossed Rs.1 billion mark in 2021 and export sales also posted a reasonable growth. Cost of sales grew by 25.61 percent year-on-year due to greater order generation which increased the cost of materials consumed, installation charges as well as salaries expense. Gross profit grew by 6.45 percent year-on-year in 2021 but GP margin shrank to 32.7 percent. Administrative and distribution expense multiplied by a whopping 136 percent year-on-year as the company booked massive provisions for expected credit losses from related parties. Yet again, other income came to the rescue. With 128 percent year-on-year growth, other income stood at 53.4 percent of AVN’s topline in 2021 and gave a strong push to the operating profit which grew up by 44.48 percent year-on-year in 2021 with OP margin of 65.6 percent. Other income mainly comprised of hefty exchange gain as well as dividend income from subsidiary companies. Finance cost slumped by 17.95 percent year-on-year in 2021 due to monetary easing despite the fact that the company had increased its short-term financing during the year. Net profit grew by 51.54 percent year-on-year in 2021 to clock in at Rs.1021.11 million with NP margin of 55.6 percent. EPS slightly reduced to Rs.3.09 in 2021 as AVN’s share capital grew by issuing bonus shares besides issuance of shares under employee share option scheme.

In 2022, AVN achieved only 1.6 percent year-on-year growth as its local sale of goods tumbled. Export sales and services continued to inch up during the year. Cost of sales grew by 5.77 percent year-on-year on the back of higher payroll expense, installation charges, travelling related to engineering services as well as import cost. Gross profit dwindled by 6.97 percent year-on-year in 2022 while GP margin dropped to 29.97 percent. Greater allowance for expected credit losses culminated into 91.82 percent year-on-year surge in operating expense in 2022. Other income grew by 121 percent year-on-year in 2022 on the back of huge exchange gain, gain on acquisition of EmpiricAI (Private) Limited. Other income grew to 116.26 percent of AVN’s sales in 2022 and resulted in a 66.54 percent hike in operating profit. OP margin staggeringly increased to 107.5 percent in 2022. Finance cost magnified by 174 percent year-on-year in 2022 due to excessive hikes in discount rate coupled with an increase in lease liabilities during the year. Bottomline grew by 70 percent year-on-year in 2022 to clock in at Rs.1736.812 with NP margin of 93.2 percent. EPS clocked in at Rs.4.55 in 2022.

AVN posted a stunning 53.26 percent year-on-year growth in 2023. According to 9MCY23 financial statements issued by the company, the sales growth can be attributed to major developments in the company’s business in the Middle East. The company’s order generation in the local as well as Middle Eastern market in 2023 stood well above its yearly and sets good tone for 2024. Cost of sales grew by 47.83 percent year-on-year in 2023, however, with robust export sales and weaker local currency, AVN was able to strengthen its gross margin which grew to 32.5 percent in 2023 with 65.94 percent taller gross profit. Administrative and distribution expenses mounted by 80.58 percent in 2023. If past trend is to be considered, it may be due to elevated allowance for ECL. Other income grew by 16.19 percent in 2023 and stood at 88 percent of the company’s core revenue. Exchange gain is the major component of AVN’s other income. The stability of Pak Rupee towards the end of CY23 may have resulted in lower exchange gain when compared to previous year. The company recorded 7.23 percent higher operating profit in 2023; however, OP margin drastically fell to 75.2 percent from its peak level of 107.5 percent attained in 2022. Finance cost grew by 36.82 percent in 2023 on account of higher discount rate as well as increased liabilities (according to 9MCY23 report). AVN’s net profit registered a paltry 5.06 percent growth in 2023 to clock in at Rs.1824.659 million with EPS of Rs.4.78 and a considerably lower NP margin of 63.9 percent when compared to NP margin of 93.2 percent attained in 2022. The company also announced 20 percent cash dividend and 10 percent bonus shares in 2023.

Future Outlook

AVN’s expansion into new geographical markets as well as new products and services categories will drive growth in the coming times. The acquisition of EmpiricAI has already paved its way in the advanced analytics market. While the local market may remain sluggish on account of prevailing political and economic challenges and subdued business activity, export sales will not only buttress the topline but also translate into enormous exchange gain for the company. AVN’s subsidiaries are also making remarkable strides. Hence, the bottomline and margins are highly anticipated to be hale and hearty.

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