Avanceon Limited

Avanceon Limited (PSX: AVN) is a leading provider of industrial automation, process control and systems integration as well as proprietary energy management solutions and support services. Avanceon has been in the automation business since 1984 and has transformed into a 360-degree solution provider for automation, energy management, service and maintenance for major blue chip companies. The company has strategic technology partnerships with the top software and hardware OEMs like Rockwell Automation, Schneider Electric, General Electric, Siemens, WEG, Belden, Schaffner etc.
In 2013, Avanceon launched its Highway 50 plan, which was the firm's first 5-year business plan. $50 Million market cap by 2017 was the corner stone of this strategic business plan; the plan also involved implementing critical goals that included the creation of cross-functional marketing and business development departments in Pakistan as well as expanding business in the Middle East region. The five key points of Highway 50 were living the brand; increasing and retaining high quality human capital; reducing variability in process execution; building relationship and responsiveness for client success; and after-project sales and services.
In the same year, the company also successfully launched Avanceon Employee Stock Option Scheme. The company went public in 2014 and its shares, which have been beating the benchmark index, are listed on Pakistan Stock Exchange.
The company's engineering has built the company's reputation for being the preferred main automation contractor in electrical, instrumentation and control for the process and manufacturing industries as well as infrastructure and buildings across Asia and Middle East over the past 2 decades. The firm also offers complete project management, where it offers full suite of engineering services to initiate, plan, implement, and close projects of all sizes throughout their entire lifecycle.
Its key revenue segments are the oil and gas sector, food and beverages, and specialized infrastructure, whereas recently, the firm has started working on projects in the water treatment segment and specialized infrastructure as well, as highlighted by the CEO, Bakhtiar Hameed Wain while in conversation with BR Research (Read 'Specialised infrastructure and water to be our focus', published on December 02, 2018). The company prides itself for developing and integrating over a thousand medium to large scale projects across 16 different verticals including oil & gas, water and waste management, FMCG as well as power in Asia and MENA region.
Company structure and shareholding The shareholding of the company is such that significant majorities (75 percent) of the company's shares are held by the CEO and directors, while the local public holds around 19 percent of the company's share. The chart illustrates the breakup of the shareholding at Avanceon.
Avanceon is the holding company of the Avanceon Group, with two wholly owned subsidiaries and one associated undertaking with various branches in different regions including Pakistan, the UAE, Qatar, KSA and the North America. To simplify this, Avanceon is a public limited company in Pakistan that owns 100 percent of its Dubai's subsidiary. Hence, there is no individual shareholding in Dubai. The Dubai subsidiary owned Qatar, Saudi Arabia and a small shareholding in a US company. However, the ownership of the Qatar Company was transferred from Dubai Company directly to Pakistan due to the issues in the GCC.
Latest operational and financial performance Avanceon's latest annual operational and financial performance speaks volumes of the progress the company has made. It successfully completed its first 5-year business plan called 2018 Highway 50, and 2017 performance has set the stage for 2018 for the firm. During 2017, the company was able to set a backlog of orders totaling $25 million, which is huge considering the sluggish worldwide growth and political turmoil in the Middle East. Moreover, the company outperformed its projections in all regions and sectors including the Middle East. Avanceon's performance improved noticeably in terms control over costs, liquidity, and repayment of working capital. All business segments performed well where its order generation remained at all-time high.
According to the company's annual report, new government regulations on fuel storage opened up new business of oil terminals, whereas the Middle East business performed strongly by bagging prestigious projects such as Doha and Riyadh Metro. The firm also managed to compete and win against all the major players in water management projects.
On the consolidated basis, the company's revenues maintained a positive trajectory throughout 2015 and 2016. There was a 36 percent year-on-year increase in revenues for 2017, which according to the director's report could have been much higher if some projects in the Kingdom of Saudi Arabia (KSA) and Qatar were not delayed in the second and the third quarters of FY17. However, the order generation came back on track in the subsequent quarters.
In 2017, Avanceon witnessed a slight drop in gross profit margins due to the increasingly competitive environment. However, the management is sure that the current margins can be maintained at 35 percent for the ongoing year 2018 and 2019.
The firm's bottom-line, which has been on an upward inclination in the last couple of years continued to grow, depicting a staggering growth of over 70 percent in 2017, which came largely from unrealised exchange gain on translation of foreign receivables.
Avanceon is a very low geared business entity and maintains a balanced capital structure. The company only utilises working capital lines to bridge the short-term cash needs. In 2017, the company took out short term loans to finance two big value orders in Pakistan and UAE respectively; in FY 2018, the management has plans to keep working capital balances at 2016 levels, which were lower than 2017.
Future outlook At Avanceon's latest analyst briefing, the company's CEO highlighted that after the successful completion of Highway 50, the company is in the process of devising its next strategy - The Accelerated Business Plan that kicks off in 2019. It is a 3-year plan that encompasses 100 percent increase in Pakistan core business order generation, and 50 percent increase in international core business order generation by 2021. The company plans to establish the international AMS business by 2021 in line with Pakistan success. The firm aims to achieve a market cap equal to the core business for Avanceon Digital + Services (AMS) in these 3 years.

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AVANCEON-CATEGORY WISE SHAREHOLDING                    Percentage

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Directors, Chief Executive Officer, and their                 75%

spouse and minor children (to be confirm by Company)

Associated Companies, Undertakings                          0.09%

and related Parties (to be confirm by Company)

NIT & ICP                                                       -

Banks, Development Financial Institutions,                      -

Non Banking Financial Institutions

Insurance Companies                                         0.84%

Modarabas and Mutual Funds                                  1.78%

General Public:

Local                                                      19.11%

Foreign                                                         -

Others                                                      3.18%

Total                                                        100%

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Source: Company accounts

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AVANCEON RATIO ANALYSIS

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                               2014    2015     2016    2017

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PROFITABILITY RATIOS

Gross profit ratio              36%     33%      36%     35%

Profit after tax                22%     15%      16%     20%

Return on capital employed      22%     14%      19%     23%

EBITDA Margin                   25%     20%      23%     25%

Return on equity-after tax      22%     12%      16%     22%

LIQUIDITY/LEVERAGE

Current ratio                  3.62    2.81     2.49    2.12

Quick ratio                    3.52    2.72     2.39    2.07

Cash to current liabilities    0.48    0.43     0.28    0.21

Financial leverage ratio       0.03    0.04     0.05    0.05

Total liabilities to equity    0.29    0.41     0.53    0.72

ASSET UTILISATION RATIOS

Total asset turnover           0.75    0.57     0.63    0.61

Fixed asset turnover           9.31    7.08     8.86   10.16

Inventory turnover            38.56   27.27    20.44   29.94

Trade debts turnover           1.43    1.09     1.12    0.97

Trade creditors turnover       2.82    2.12     1.89    1.36

INVESTMENT RATIOS

Price earning ratio            8.28   17.82    13.88    8.12

Dividend payout ratio           55%     87%      40%     53%

Dividend yield ratio          0.66%   0.49%    0.29%   0.65%

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