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Avanceon Limited
Friday, October 15, 2021
AVANCEON: The Tech Saga Roles On !
We initiate our coverage on the stock with a BUY recommendation on
the company with a Target Price of PKR 185/share for Dec-22 thus KEY STATISTICS
proving an upside of 57% from the LDCP of PKR 117.64/share. We Bloomberg Ticker AVN. PA
comprised our valuation using the discounted cash flow with a WACC of Market Cap (PKR bn) 29.70
16%. The company is currently trading at CY22 F P/E of 14.08x.
Free Float Market Cap (PKR mn) 72.30
Company Overview 52 week range 58.03-145.40
AVN was incorporated in 2003 as a Private Limited Company and was Shares Outstanding (mn) 256.00
later in 2008 converted to a public limited company. The company is Current Price (PKR) 117.64
primarily a tech centric company where it offers flexible solutions to it’s Target Price (PKR) 185.00
clients. The company has continued to show strong growth over the Upside 57%
past 5 years (CAGR-32%). The company’s primary source of revenue is Source: Company Financials , Darson Research
derived through their project revenue business where it contracts with
foreign government entities to collaborate on local projects.

Business Overview
Financial Highlights
The company’s business is divided into six broad categories- CY19A CY20A CY21E CY22E CY23E CY24E
Revenue (PKR mn) 4,896 6,445 7,828 9,086 10,595 11,974
Gross Profit (PKR mn) 1484 1842 2791 3574 4364 4924
Core Business-
Gross Margins 30% 29% 36% 39% 41% 41%
The company here basically provides automation solutions to deal with EPS (PKR) 3.55 4.07 6.52 8.23 10.11 11.42
client needs or further assist them in their regulatory requirements. So EPS Growth N/A 15% 60% 26% 23% 13%
for example AVN assists their Oil and Gas clients with the P/E 10.85 28.89 18.05 14.30 11.63 10.30
implementation of supervisory, control and data acquisition (SCADA)
Source: Company Financials , Darson Research
services while cement clients are assisted in curtailing energy costs.
Further the core businesses also include process controlling services and
consultation for automation of processes. This is where the company
designs and delivers specific models to assist their clients with their
internal needs. The company is also engaged in providing system
integration services where the company in partnership with Microsoft, Revenue Growth (CY15-CY20)
Honeywell, etc. assists their clients in developing an integrated systems Revenue (Mn)
interface which are catered according to their client needs. The business 7,000 6,444
contributed around 6% to the total revenue in CY20, however we CAGR-32%
6,000
expect this contribution to increase to around 12% going forwards as 4,896
5,000
the company has a strong clientele base which should cater to the
4,000 3,480
business’s growth. 2,813
3,000
2,063
1,635
Specialized Solutions- 2,000

The company here provides energy management solutions for their 1,000
clients. The company implements advanced softwares such as iWater, 0
iBoiler, etc. to manage and optimize plant operations. The company CY-15 CY-16 CY-17 CY-18 CY-19 CY-20

derived 11% of their net revenue in CY20 through this part of the Source: Company Financials , Darson Research
business. This figure has more or less remained stable over the years
(average 8% since CY 16) with slight growth seen within the past couple
of years. We expect the contribution to be around an average of 11-
12% from this business going forward on the back of ever increasing
demand for these services as industries seek to maximize their
operational efficiency through adopting these specialized services.
Continued on next pg.

After Market Services (AMS)-

This is where the company provides maintenance and technical support
to their customers. This business has seen a positive growth of 12% YoY
since CY-2013. This business is being transformed into Octopus Digital
and further listed on the PSX. The company are also enhancing their Vali Nagaria
operations where they will collect and interpret real time data for their vali.nagaria@darson.com.pk
clients. We have covered Octopus in great detail and if you want to read Tel: 021-32467224
more on this topic please click here.
Notified Research Entity | DISCLAIMER - For important disclaimer and contact details, see the last page of the report Best Retail Brokerage 2020 Page No. 1
 www.darson.com.pk - UAN: 111 900 400

Avanceon Limited
Overseas Business-
This is where the company provides tech services and solutions in foreign Business Segment Revenue Share CY-20
countries either in the private or public sector. The company has a diverse
consumer base that is spread across different regions particularly with in 12%
the Middle East. The company’s revenue mix as of CY20 comprised of 70% 6%
2%

exports and 30% local sales compared to CY18 where the mix comprised of
51% local and 49% Exports. This shows us how the company priorities have 11%

shifted towards a more export oriented business due to better 61%

opportunities. If we further break down the revenue mix we can see that 8%
Qatar has the biggest share of revenue within the exports segment at 53%
followed by Saudi Arabia at 9% and UAE at 8% as of CY20. The export
revenue for the business has grown by almost 15x since CY17 and further
the revenue from Qatar has enhanced by almost 5X. The business should
be able to see positive revenues from this segment going forwards due the
company’s strong foothold within the Middle Eastern markets and further AMS Core Business

the company’s desire to expand into other foreign markets such as Egypt, Manufacturing and Assembling Specialized Business

Nigeria and the USA. Further we expect this segment to grow at an average Engineering and Back Office M.East & U.S.A

of 15% per year for the next 5 years (up to CY25). Source: Company Financials, Darson Research

Engineering
The company basically provides in house engineering services where they
offer installation/maintenance services to their clients along with post
implementation and support services. This part of the business contributed
around 8% of the total revenue in CY20. We expect this business to grow
by around 11% in the next 5 years.

Manufacturing & Assembly

Here the company manufactures and implements executive systems that Region Wise Revenue Share CY-20
are designed specifically for customer needs. The company basically
provides upstream and downstream services to their clients. This part of
the business contributes a small percentage to the company’s revenue as
the share from this part of the business was at around 1.7% in CY20. We
expect this business to make marginal gains as we expect it to grow by3%
within the next five years. The reason why this part has a low contribution
towards the sales mix is due to the company's intention and focus towards
the export and after market business which provide room for innovation
and growth. These allow the company to pursue new avenues at lower
sunk costs which when compared to manufacturing and assembling require
a hefty capital input

Geographical Mix

Qatar
Qatar is a key player for the company’s revenue generation as we saw
above (52% revenue derived from this region). The reason we saw the
company generating such revenue from Qatar was primarily due to the
Qatari’s government focus on developing the infrastructure and
transportation sector within the country and thus due to AVN’s expertise Source: Company Financials, Darson Research
and excellence within those sectors it was able to get those orders and we
expect these to continue on the basis of upcoming expansion plans due to
the FIFA World Cup 2022. Further as the Oil will continue to stabilize and
recover it will enhance revenues for the Qatar government thus allowing
them to take on more expansion projects which would bode well for AVN’s
future revenue generation. To cope and establish their business further the
company in 2020 incorporated a new wholly owned subsidiary in the state
of Qatar with the name Avanceon QFZ LLC. The state of Qatar has
established free zones where by the company will be able to avail benefits
such as 20 year tax holidays, zero corporate tax & zero customs duty.

Page No. 2
 www.darson.com.pk - UAN: 111 900 400

Avanceon Limited
Pakistan Avanceon Clientele
As we mentioned above that AVN’s generates almost 30% of their
business from Pakistan which is down from 51% in CY18. Even though
this figure has declined over the years Pakistan still remains a key
revenue destination for the company. Even though Pakistan still lacks
behind a lot of developed nations but the country is still making
significant progress on that front. Pakistan saw a significant
enhancement in their IT exports in FY21 where they saw an YoY
increase of 47% to reach at $2.1bn. We further expect this trend to
continue as the market has more potential to grow on the back of
favorable government policies and the ever increasing appetite of
companies to adopt tech solutions (especially post covid-19). The
country’s population and it’s industries have a massive potential for
growth. Currently only 18% of the population has access to a smart
phone within the country thus depicting future potential. An example
of this could be seen where Octopus (AVN’s subsidiary) signed a
contract with HUBCO (one of the largest power producers in the
country). Through this contract the company will provide data
collection and interpretation services on HUBCO’s plant. This should
allow the company to attract further new clients locally.

Saudi Arabia /UAE and other export avenues

KSA was a major contributor towards the company’s revenues as AVN

nearly derived 40% of their revenues from this region in CY19 however
this figure declined to 9% in CY20. This was primarily due to the
disruption caused by the COVID situation which further had a negative
impact on the Oil market. This caused the country to have a less of a
appetite for expansion and infrastructure enhancement however going
forward as the corona situation eases we expect KSA to push for
expansion and development within sectors such as healthcare,
transportation, thus AVN could generate contractual revenue going
forward.
The company has been able to generate stable revenues from the UAE
of around 8% in CY19 and CY20. This figure may be get a slight boost
going forward on the basis of the country’s intention to develop and
grow. Further the company is trying to explore and enter new markets
such as Egypt and Nigeria where the company can cater to the demand
of these growing economies.

Future Outlook
Source: Company Financials, arson Research

The company generally has a positive outlook as mentioned in the text

above and should continue to post positive returns going forward on
the basis of-

• The company has $53mn of future orders as of Dec-20

• The Listing of Octopus (AVN’s subsidiary) on the PSX should have a
positive impact on the earnings and valuation
• The growth of the IT sector within Pakistan will help the company to
generate more business locally
• Diversified client base across different sectors will protect the
business from any unwarranted macro risks
• The recent depreciation of the PKR/USD will benefit the company in
terms of exchange gain as most of it’s revenue is generated through
exports (70%)
• The growing appetite of countries especially post COVID to
implement and adopt tech services and solutions

Page No. 3
 www.darson.com.pk - UAN: 111 900 400

Avanceon Limited
Valuation

We have a BUY recommendation on the company with a Target Price of PKR

185/share for Dec-22 thus proving an upside of 57% from the LDCP of PKR
117.64/share. We comprised our valuation using the discounted cash flow with
a WACC of 16%. The company is currently trading at CY22F P/E of 14.08x.

Key Risks to the Company

• Inability of the company to attract new clients

• Regime change in Pakistan where the new government may not be so keen
to adopt favorable tech centric policies
• Increasing Oil prices would reduce the appetite of Middle East nations to
spend on their infrastructure
• PKR appreciation against the USD

Page No. 2
DARSON SECURITIES LIMITED DISCLAIMER
TREC HOLDR: PAKISTAN STOCK EXCHANGE / PAKISTAN MERCANTILE EXCHANGE LTD.

This report has been prepared by Darson Securities Ltd. and is provided for information purposes only. Under no circumstances
it is to be used or considered as an offer to sell, or a solicitation of any offer to buy. This information has been compiled from
sources we believe to be reliable, but we do not hold ourselves responsible for its completeness or accuracy. All opinions and
estimates expressed in this report constitute our present judgment only and are subject to change without notice. This report is
intended for persons having professional experience in matters relating to investments.

Research Dissemination Policy:

Darson Securities Ltd. endeavors to make all rightful efforts to disseminate research to all eligible clients in a timely manner
through either electronic or physical distribution such as email, mail and/or fax. However, it is worth mentioning that, not all
clients may receive the material at the same time.

Analyst Certification:
The research analyst(s), if any, denoted by AC on the cover of this report, who exclusively reports to the research department
head, primarily involved in the preparation, writing and publication of this report, certifies that the expressed views in this
report are unbiased and independent opinions of the analyst(s). The observations presented also accurately reflect the
personal views of the analyst(s) based on the research about the subject companies/securities and in any case, no part of the
compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or
views in this research report. It is also important to note that the research analyst(s) or any of its close relatives do not have a
financial interest in the securities of the subject company aggregating more than 1% of the value of the company. Additionally,
the research analyst or its close relative have neither served as a director/officer in the past 3years nor received any
compensation from the subject company in the past 12 months. The Research analyst or its close relatives have not traded in
the subject security in the past 7 days and will not trade in next 5 days.

Financial Interest Disclosure:

Darson Securities Ltd. or any of its officers and directors does not have a significant financial interest (above 1% of the value of
the securities of the subject company). Darson Securities Ltd., their respective directors, officers, representatives, employees
and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or
issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such
securities or other financial instruments from time to time in the open market or otherwise.

Risk Associated with Target Price:

Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may
include geographic mix and introduction of improved products or service offerings by competitors. The results of operations
may be materially affected by global economic conditions generally, including conditions in financial markets. The company is
exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices.

Rating System:
If;
• Expected return >15% - Buy Call
• Expected Return is in between 0% to 15% - Neutral/Hold Call
• Expected Return <0% - Sell Call

Valuation Methodology
To arrive at our period end target prices, DSL uses
different valuation methodologies including:

• Discounted cash flow (DCF, DDM)

• Justified price to book (JPB)
• Relative Valuation (P/E, P/B, P/S etc.)
• Equity & Asset return based methodologies (EVA, Residual Income etc.)
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