Avanceon IPO

The Bell Avanceon Limited Subscribe
Offer Price: PKR14/share Corporate Structure Pakistan Research
31 December, 2013
Avanceon Unique business on offer

An engineering solutions provider: Avanceon is primarily involved in providing automation, control systems integration, energy management solutions and support services. It has been in the automation business since 1989 and has grown to become Pakistans premier automation service providing company, catering to various industrial conglomerates and blue chip companies including Nestle, Aramco, Engro, and OGDC etc. Increasing visibility the key rationale for IPO: The company highlights that its rationale for going public is that: i) It would enhance companys visibility in the international market and allow it to augment its existing client base ii) It will unlock value of Employee Stock Options (5mn shares at a strike price of PKR1/share) and thus enable AVN to retain its existing human resource and iii) The cyclical industry in which AVN operates warrants minimum use of debt financing. IX Model Linchpin for Avanceon: AVNs International Execution (IX) model allows the company to execute a significant portion of its offshore projects from Pakistan, thereby enabling it to take advantage of lower labor costs. Attractive valuations; recommend subscribe: Management estimates suggest CY13/14 EPS of 4.7/7.1. The stock seems attractive at the offer price of PKR14/share, at which CY13E/14E PER comes to 3.0/2.0x. Key Risks: Despite stellar earnings growth potential, we highlight some key risks including 1) Employee turnover and 2) volatile earnings stream.
Avanceon Limited (AVL)
Avanceon FZE (UAE)

100% owned subsidiary of AVL
Engro Innovative Inc. (USA)

100% owned subsidiary of FZE
Avanceon LP (USA)
26% owned by Engro Innovative
Transaction Structure 18.87mn s ha res Book Bui l di ng s ubs cri bed a t fl oor pri ce of PKR14/s h. 6.3mn s ha res a t offer pri ce of IPO PKR14/s h. IPO da tes 7th & 8th Ja n
AVN Financial Highlights CY09A EPS DPS (PKR) BV/share PER (x) PBR (x) EV/EBITDA ROA ROE EBITDA growth Net Profit growth 0.2 2.4 59.1 6.0 11.4 NA NA NA NA CY10A (1.9) 0.5 N.M 30.3 N.M -16% -138% -123% N.M CY11A (2.0) -1.5 N.M N.M N.M -19% 395% -10% 2% CY12A 7.6 10.0 1.8 1.4 1.6 50% 178% -2328% N.M
Source: Elixir Research, Company Accounts
About Avanceon
M. Ibad-Ur-Rehman [email protected] (+92-21) 111 354 947 Ext: 3122
AC
AVN started its operation in 1989 under the leadership of Bakhtiar H. Wain, a mechanical engineer by profession, with rich engineering experience in Exxon Chemicals, Fauji Fertilizer and ICI Pakistan. Since then AVN has become a premier automation service provider in Pakistan vying for global outreach with strong emphasis on the growing Middle East market.
Please refer to the last page for Analyst Certification and other important disclosures.
Provides engineering solutions to the manufacturing sector

Avanceon Limited is primarily involved in providing engineering solutions. It caters to the demand of manufacturing sector of the economy including Foods (Nestle, Engro Foods), Energy (Lalpir, Saudi Aramco, OGDC) and Chemicals (Fauji Fertilizer, Lotte Pakistan). AVN offers three distinctive services namely: i) Turnkey automation and process controls ii) Energy management solutions (EMS) with key products including Energy Dashboard, iWater and iBoiler and iii) After Market Solutions (AMS) which includes complete lifecycle support services and is often bundled with automation and EMS services.
Increasing visibility the key rationale for IPO

Capital raised from the IPO will primarily be used for the expansion of existing training facility in Lahore (PKR125mn) and opening of representative offices in Middle East (PKR75mn) and th building cash reserves (PKR100mn). However it is pertinent to note that AVN as at 30 June 2013 held enough cash and cash equivalents and short term investments (PKR355mn) to easily finance its expansion projects in Pakistan and Middle East. Furthermore, its unlevered balance sheet provides AVN with room to avail cheaper debt financing for its expansion projects. The company highlights that its rationale for going public is that: i) It would enhance companys visibility in the international market and allow it to augment its existing client base ii) It will unlock value of Employee Stock Options (5mn shares at a strike price of PKR1/share) and enable AVN to retain its existing human resource and iii) The cyclical industry in which AVN operates warrants minimum use of debt financing.
IX Model Linchpin for Avanceon

AVN has over the years developed a unique outsourcing bu siness model International Execution (IX). This allows the company to execute a significant portion (70 -80%) of offshore projects in Pakistan, thereby enabling it to take advantage of lower labor costs in the country. IX model also insulates AVN from any downturn in demand as majority of the engineers are based in Pakistan and can easily switch from one dormant project to another active project. Successful execution of IX model will be the key going forward as any failure will not only increase costs significantly, but will also put a major dent in AVNs corporate reputation, thereby hurting its ability to attract more contracts in the future. Total cumulative savings generated from using IX in 2012 was PKR97mn while in 1H13 was PKR59mn.
Robust earnings growth in CY14

AVN posted a turnaround in earnings in CY12 (PKR 763mn) on the back of increased sales (CY12: PKR 2122mn; CY11: PKR 1268mn) arising from major contracts awarded amid costs rationalization stemming from successful implementation of IX business model. As per management estimates, earnings for CY14 shall clock in at PKR7.1/share driven mainly from growth in core business segment in Pakistan (30%) and Middle East (62%). The reason for high earnings growth in CY14 stems from contracts that AVN has already obtained in CY13 and whose earnings will be realized in CY14. Additionally PKR/USD depreciation will further boost earnings for CY14 as 80% of the revenue is USD denominated. Furthermore, we believe that the company has successfully established itself as a credible engineering solutions company in the Middle East given its flagship projects (Saudi Aramco, Dubai Metro and Lusail City), and therefore will be able to exploit massive demand arising from infrastructure developments in the region.
Attractive valuations; recommend subscribe

Management estimates suggest CY13/14 EPS of 4.7/7.1. The stock seems attractive at the offer price of PKR14/sh, at which CY13E/14E PER comes to 3.0/2.0x. Exposure in AVN will also provide protection from PKR depreciation since 80% of the total revenue is USD-denominated. We recommend subscribe at these levels given strong earnings growth potential. 2
Key Risks
Despites stellar earnings growth potential of AVN, we highlight some major risks that can erode value: i) AVN is highly dependent on its employees since this is the key resource used in delivering services. Thus employee dependency and turnover is high as they are easily enticed by world renowned automation companies ii) Main driver of growth for AVN stems from infrastructure projects in the Middle East. Any issue in procuring overseas contracts will be an impediment to posting earnings growth in the future.
Analyst Certification The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. Disclaimer The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. Research Dissemination Policy Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time. Company Specific Disclosures Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) 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. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein. Other Important Disclosures Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.
Copyright 2013, Elixir Securities Pakistan (Pvt.) Ltd. All rights reserved. This report or any portion hereof may not be reproduced, distributed, published or sent to a third party without prior consent of Elixir Securities Pakistan (Pvt.) Ltd.

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The Bell Avanceon Limited Subscribe

Offer Price: PKR14/share Corporate Structure Pakistan Research

Avanceon Unique business on offer

Avanceon Limited (AVL)

Avanceon FZE (UAE)

Engro Innovative Inc. (USA)

Source: Elixir Research, Company Accounts

Provides engineering solutions to the manufacturing sector

Increasing visibility the key rationale for IPO

IX Model Linchpin for Avanceon

Robust earnings growth in CY14

Attractive valuations; recommend subscribe

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