Karachi, May 18, 2023 (PPI-OT): AVN and OCTOPUS: Management remains hopeful

Avanceon Limited (AVN) is one of the leading Pakistan based technology businesses with a global footprint in the automation and system integration market. The company held its Corporate Briefing yesterday, we present key takeaways from the session.

Management reiterated its plan of crossing order generation of US$100mn mark by CY25 for the group, where 80% of revenues are targeted from MENA region. The company's revenue target for CY23 is set at US$70mn.

Octopus Digital (OCTOPUS, 80% held subsidiary), posted a 17% YoY growth in earnings during CY22. OCTOPUS is projected to post a revenue of US$8.85mn for CY23. Earlier projection for the year was US$9.5mn.

CY23 revenue target set at US$70mn for AVN

Avanceon Limited topline growth has been strong over the years, the company posted a topline 5-year CAGR of 28%. A major percentage of revenue comes from the oil and gas industry, both upstream and downstream. To diversify, the company is focusing on various projects and geographical locations.

Management shared in yesterday's corporate briefing that it follows a highly conservative revenue recognition policy under IFRS-15. The business has a revenue recognition policy tougher than accounting fundamentals adopted by the SECP. Management shared a revenue recognition matrix for revenue recognition guidance according to which very little deliveries are recognized in the first quarter

of the calendar year whereas major portion of the revenue is recognized in the third quarter.

Revenues and profits hence usually remain on the lower side in the first half. Management highlighted that Avanceon Group has an order backlog of US$61.2mn for 2023. To recall, the company in its previous briefing had shared US$71mn backlog as at Sep-2022. Management shared that Breakeven sales estimates for AVN come to around US$39mn. AVN’s revenue target for CY23 is set at US$70mn whereas net margin for the group is expected at 12% for CY23 as per company’s own projections.

AVN posted a relatively lower than expected dollarized revenue during CY22, due to delay in LC approvals. PKR devaluation however contributed significantly to the other income as more than 70% of the company’s sales are to international clients and thus are positively impacted by rupee devaluation.

Reiteration of the US$100mn target by CY25

Management reiterated its plan of achieving order generation of US$100mn mark by CY25 where 80% of the revenue is targeted from the MENA region with US$40mn targeted from UAE and North Africa whereas, US$40mn from the Qatar and KSA region. AVN has plans to expand its product portfolio for the Oil and gas sector in UAE and Africa. Company is focused on the new state of the art facility in UAE where major focus would remain on ADNOC based projects to gain market share.

Process business - US$20mn sales target by CY25

The group’s growth initiatives include the formation of the Process Business vertical from where the group targets revenues of around US$5mn for CY23. AVN plans to take it up to US$20mn by the year 2025. Management projects the segment to post a bottom-line of around US$900mn during CY23 (18% net margin for the segment). The segment has ongoing projects in Kazakhstan (worth US$320k) and Nigeria (worth US$1.15mn) whereas projects in UAE are also in the pipeline. Product offerings include Chemical injection skids, Wellhead hydraulic control panels, Membrane systems and solar system for oil wells. The process division shall be working across all geographies and leverage the group’s footprints and resources. AVN has also setup a JV in Nigeria focusing on Oil and Gas Automation business and Digitalization.

OCTOPUS Digital - a diversifier for AVN

The group's flagship, Octopus Digital (OCTOPUS, 80% held subsidiary), posted a 17% YoY growth in earnings during CY22. OCTOPUS is projected to post a revenue of US$8.85mn for CY23. Earlier projection for the year was US$9.5mn. Whereas, Net profit for CY23 is projected at US$2.14mn for which earlier projection was US$3.7mn. Since Octopus Digital is not impacted by the same cycles as AVN and has a different array of services offered, the company is considered as a great diversifier.

AVN Group's collaboration with Zamil O and M Company (ZOMCO), a provider of operations and maintenance services in Saudi Arabia, is expected to help it win other projects as well. Management is hopeful that OCTOPUS is also anticipated to have access to several channels through ZOMCO. Through this agreement, the management also hopes to break into the banking facilities market.

Empiric AI to help expand digital footprint

Empiric Al is a supplier of advanced analytics solutions built on artificial intelligence that enables businesses to increase dependability, cut costs, and increase yield. It gives quantifiable and meaningful results through process optimization and energy reduction by applying their proprietary Al models to the plant data of their clients. They continue to develop and innovate Al-based industrial loT solutions with a global reach through their knowledge of data sciences, software development and Process Engineering. AVN believes that Empiric AI can help the group realize synergies and expand its digital footprint. Empiric AI has an opening backlog of US$1.5mn from which it expects to realize sales of US$1.39mn during CY23. Net margin for the segment is expected at 49% for the year.