Investment Highlights

• We maintain BUY call on Ancom Nylex (Ancom) with an unchanged fair value (FV) of RM1.43/share. This is pegged to a target FY24F PE of 14x, 0.75 standard deviation (SD) below its 5-year mean of 21x. No ESG-related FV adjustment based on an unchanged 3-star rating.

• Our FY24F-26F forecasts are maintained following a recent management update.

• In mid-Sep 2023, the Australian Bureau of Meteorology declared the onset of El Niño, predicting that this weather pattern will persist through at least the end of the Dec 2023- Feb 2024 summer season in the southern hemisphere. However, Ancom guided that potentially weaker demand from Thailand, Malaysia and Australia could be offset by stronger orders from USA, Brazil and Mexico, alongside USA-based customers’ trade diversion of timber preservatives (1 of Ancom’s 5 active ingredients) from China to Ancom.

• Management guided that the Product T, with an initial capacity of 1K MT/annum (which can be scaled up to a max 3K MT/annum), should be commercialised as scheduled in Dec 2023 or slightly later in Jan 2023.

• For Product S with an initial capacity of 500 MT/annum (which can be scaled up to a max 1.5K MT/annum), the group anticipates that equipment installations will be completed by 1H2024 and commercialisation will begin in 2H2024. Technically simpler to manufacture than Product T, Product S has passed all laboratory testing criteria such as purity & yield.

• Ancom recently visited Brazil and provided an update on the plan to expand the use of monosodium methanearsonate (MSMA)-related products as a replacement for paraquat, which was banned in 2021, for soybean crops from existing sugarcane applications. After obtaining positive results from in-house trials, Ancom will proceed to 2 official trials with the Brazilian Ministry of Agriculture and Livestock (MoAL) in Sep 2023.

• For now, Ancom targets to commercialise MSMA-related products in Brazil for the soybean market by late 2024 or early 2025. According to Statista, soybean cultivation accounted for 41mil hectares of Brazil's planted acreage, which is 5x greater than sugarcane's 8.3mil hectares. As a result, we may only see a contribution from this crop diversification beginning in FY25F, which could be substantive. Nevertheless, we have not accounted for this development in our FY25F-26F revenue, pending official approval by Brazilian MoAL.

• Based on Ancom’s market research, the functionality and pricing of the group's MSMA-related products in Brazil are highly competitive compared to those of competitors.

• In a separate development, Ancom clarified that the recent collaboration with Mimos and HELM AG, a Germanybased crop protection group, to initiate a pilot programme to assist local farmers in improving crop yields while reducing environmental impact by leveraging SKYFLD will not generate any revenue and profit over the next 2 years. SKYFLD is a digital precision-farming platform developed by HELM.

• The role of Ancom is to facilitate connections among local farmers to HELM AG in Malaysia and gradually enable both companies to expand into South East Asia. This move marks Ancom’s entry into precision farming operations. The result of the programme will be evaluated by 1Q2024, and management anticipates a profitable business model to be developed to capitalise on the precision farming fad. For now, we do not incorporate any contribution from this programme given the need to first gain acceptance by the farming community.

• Going into FY24F, we expect agrichemicals segment to benefit from: (a) trade diversion from China to Ancom, (b) shift in demand from expensive patented herbicides to cheaper generic versions amid an expected global economic slowdown, (c) commercialisation of Product T in Dec 2023 or slightly later in Jan 2023, and (d) better oil price trajectory since late-Jun 2023, which should also support higher product price for the industrial chemicals segment.

• The stock currently trades at an unjustified FY24F PE of 12x, almost half of its 5-year mean of 21x, for the largest agrichemical manufacturer in ASEAN.

Source: AmInvest Research - 3 Oct 2023