Karachi, November 11, 2022 (PPI-OT): AVN and OCTOPUS: Optimistic targets for the future
We present key takeaways of Avanceon Limited’s (AVN) Corporate Briefing session that was held yesterday. The company is one of the leading tech companies with a global presence in the automation and system integration business with a top-line 5-year CAGR of 20%.
Management shared its plan of achieving order generation of US$100mn mark by CY25, where 80% of revenues are targeted from MENA region. The company has recently invested in DAWH’s Empiric AI, targeting to realize synergies given similar operations of AVN and Empiric AI.
The group’s flagship, Octopus Digital (OCTOPUS, 80% held subsidiary), also continues strong performance, where it posted a 43% YoY growth in earnings during 9MCY22. OCTOPUS is projected to post revenue of US$9.5mn for CY23, taking it to US$37mn by CY27.
Dull revenue during 9MCY22
Avanceon Limited (AVN) is one of the leading tech companies with global presence in the automation and system integration business. The company has shown impressive growth in top-line over the years (5-year CAGR of 20%). The oil and gas industry, both upstream and downstream, accounts for a significant portion of revenue. In order to increase diversity, the group targets different projects and geographical areas.
AVN announced relatively lower than expected dollarized revenue during 9MCY22, due to delay in LC approvals. PKR devaluation however contributed significantly to the other income head as more than 70% of the company’s sales are to international clients and thus are positively impacted by rupee devaluation.
Better quarters ahead
Management, in its corporate briefing held yesterday, shared that it follows IFRS- 15 for revenue recognition and that the company has a very conservative revenue recognition policy, making revenue recognition policy stricter than accounting fundamentals implemented by SECP. They apprised a revenue recognition matrix or a reference grid for revenue recognition according to which very little deliveries are recognized in the first quarter of the calendar year and 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. Due to supply chain issues this time around some portion of the revenue could not be recognized in 3Q and will now likely reflect in the last quarter of CY22. Management highlighted that Avanceon Group has an order backlog of US$71mn as at Sep-2022.
Management guidance – Future roadmap 2025
Management shared its plan of achieving order generation of US$100mn mark by CY25 where 80% of the revenue is targeted from the MENA region. For this purpose, the company plans to expand in the markets where it already has presence – the Qatar, UAE and KSA markets. AVN also plans to expand its product portfolio for the Oil and gas sector in UAE and Africa. The core business is expected to organically grow by 10-15% on a YoY basis and at a 4-year CAGR of 16% until FY25 for Pakistan. With additional growth initiatives the 4-year cumulative growth rate is expected to increase to 24%. For the UAE region the organic growth is assumed at a CAGR of 23-25% over the next 3-4 years which might get to 55% with growth initiatives.
Process business segment to grow over time
The group’s growth initiatives include the formation of the Process Business vertical from where the group targets revenues of up to US$20mn by the year 2025. The segment has already kick started and has projects in Nigeria, Kazakhstan and UAE in the pipeline. Product offerings include Chemical injection skids, Wellhead hydraulic control panels 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 continues to expand its footprint
The group’s flagship, Octopus Digital, posted a 43% YoY growth in earnings during 9MCY22. Octopus is projected to post a Revenue of US$9.5mn for the next year. Whereas, Net profit for the next year is projected at US$3.7mn. Octopus Digital is expected to post a revenue in excess of US$37mn by the year 2027. 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. The dollarized gross margins for 2027 are expected at 67% (rupee gross margins for 9MCY22 clocked in at 72%). The company has not incurred any meaningful marketing expenditure yet and has hired a consultancy firm for the same.
The company’s collaboration with Zamil O and M Company (ZOMCO), a provider of operations and maintenance services in Saudi Arabia, represents its biggest success. OCTOPUS is 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 – A recent acquisition
ANV and Dawood Hercules Corporation (DAWH) have entered into a share swap agreement to facilitate the growth and realize the true potential of Empiric AI. Empiric Al is a supplier of advanced analytics solutions built on artificial intelligence that enables businesses to increase dependability, cut costs, and increase yield. They give genuine, 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. With similar product offerings and target audience, AVN and Empiric AI can draw from each other’s expertise and realize synergies.