Investment Highlights

• We maintain our BUY call on Ancom Nylex (Ancom) with an unchanged fair value (FV) of RM1.30/share. This is pegged to a target FY24F PE of 12.7x, 1 standard deviation below its 5-year mean given the current volatile commodity markets. This is also at parity with the 2-year forward PE of global agrichemical peers. There is no ESG-related FV adjustment based on our unchanged 3-star rating.

• We made no changes to our earnings forecasts as Ancom 1QFY23 core net profit of RM20mil came in within our expectation, accounting for 25% of our FY23F net profit.

• No interim dividend has been declared in this quarter, which is also in line with our FY23F-FY25F assumption of no distribution.

• On a YoY basis, Ancom’s 1QFY23 revenue increased by 36% to RM549.8mil from RM404.7mil in 1QFY22, doubling 1QFY23 core net profit to RM20mil from RM9.9mil. This was mostly from improved performance in the agricultural and industrial chemicals segments.

• Agricultural chemicals revenue registered an improvement of 41% YoY to RM162mil in 1QFY23, mainly underpinned by strong demand for the group’s herbicidal products, especially for ASEAN region. This was further boosted by the earnings contribution from both Shennong Animal Health (Malaysia) and Vemedim. To recap, Ancom acquired 80% equity stake of both companies in Jun 2022.

• Separately, the improvement for industrial chemicals segment was mainly supported by higher average selling prices (ASP). According to Bloomberg, the commodity index in 1QFY23 was 30% higher than in 1QFY22, in tandem with the segmental revenue growth of 33%.

• On a QoQ basis, Ancom’s 1QFY23 revenue contracted by 3% and core net profit dropped by 31%, mainly stemming from the weaker performance of industrial chemicals. This segment revenue decreased 15% QoQ to RM344mil mainly due to lower commodity prices as Bloomberg’s commodity index decreased by 4% QoQ in 1QFY23. Nevertheless, the index remains stable since a correction of 19% in early Jul 2022 from early Jun 2022.

• In the near term, we believe Ancom will continue to benefit from the ban of paraquat in Malaysia, Thailand and Brazil. Over the medium-to-longer term, the introduction of new agricultural active ingredients will further boost the group’s FY23F-25F earnings.

• The stock currently trades at a compelling FY24F PE of 9.8x, which is 23% below the 2-year forward sector average of 12.7x.

Source: AmInvest Research - 18 Oct 2022