Investment Highlights

• We initiate coverage on Ancom Nylex (Ancom) with a BUY recommendation at a fair value (FV) of RM1.30/share, pegged to FY24F PE of 12.7x which is 1 standard deviation below its 5-year mean in view of current volatile commodities market. This is also at parity with the 2-year forward PE of global agrichemical peers, without any ESG-related adjustment based on our neutral 3-star rating.

• Ancom has been a pioneer in the manufacturing of agricultural chemicals (agrichem) since inception. Over the years, Ancom’s business model has evolved and diversified from an agrichemical manufacturer to a conglomerate with a wide range of operations, including industrial chemicals, polymers, logistics and other non-core activities which management now plans to eventually exit.

• ANB’s agrichem division is the only large-scale manufacturer of active ingredients (AIs) for herbicides in Southeast Asia and also a major operator in Asia Pacific.

• The manufacturing and formulation of products are carried out in 2 production plants in Malaysia located in Shah Alam and Port Klang with a combined annual capacity of 42mt.

• Recently, the company completed the acquisition of 80% equity stakes each in Shennong Animal Health and Vemedim for RM24mil cash, solidifying its leading position in agrichem by providing an integrated solution across the food supply chain.

• Moving forward, the management guided that the company intends to devote all of its resources to the agrichem division, which will enhance efficiency with an expanded scale.

• With the ban of paraquat in Malaysia, Thailand and Brazil, we believe Ancom, which offers AIs for alternative herbicides, is a proxy to several long-tern positive structural trends:
  (a) increasing global food demand;
  (b) reliance of global crop yields on herbicides; and
  (c) multinationals’ China+1 strategy.

• Supported by a net gearing level that is expected to improve from 0.83x in FY22 to net cash in FY25F, we expect Ancom to register a revenue growth of 7–12% in FY23F–25F, translating to a stronger core net profit increase of 15–31%. This is attributable to the organic growth in industrial chemical business and surge in agrichem sales from the paraquat replacement market.

• The stock currently trades at a compelling FY24F PE of 9.4x, which is 26% below the 2-year forward sector average of 12.7x.

Source: AmInvest Research - 14 Oct 2022