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 to the 2-year forward PE of global agrichemical peers. No ESG-related FV adjustments based on an unchanged 3-star rating.

• Our forecasts are maintained following a meeting with management yesterday. These are the salient highlights:
  • The major earnings growth drivers for the group in FY23F will come from the agricultural chemicals segment (agrichem), benefiting from (a) increasing sales contribution from 2 new active ingredients (AI) (ie. Bromacil and Ester); and (b) strong demand for monosodium methanearsonate (MSMA)-related products (ie. Dasaflo and Monex HC) as a result of the paraquat ban, particularly from the Thailand market.
  • Bromacil was commercialised in 3QFY22 as a herbicide for the cultivation of cotton and pineapple. Demand is gradually increasing with this AI commanding an average selling price (ASP) in the mid-teen US$/unit, compared to existing products with an ASP in the low-to-mid singledigit US$/unit. This marks the group’s advancement to higher ASP playing fields on par with global big players.
  • Ester was commercialised in 1QFY23 for use on cereal crop, especially for the Australian market. The rationale behind the introduction of Ester is to seize opportunities arising from the geo-political tension between Australia and China. Currently, the Australian government imposes a tariff of 23-35% on China-manufactured Esters, but Malaysian exporters enjoy tariff-free status.
  • Similar to the group’s existing AIs, Bromacil and Ester are niche AIs without significant competitors in the market. We view this strategy positively, which allows Ancom to preserve its margin and enhance the retention of customers (Exhibit 1).
  • For 1QFY23 ASP, management guided that Bromacil, Timber Preservatives and MSMA are flattish as compared to FY22, whereas Ester fell 15-20% and Diuron dropped by 3-5%. This was partially offset Monex HC’s ASP increasing by 5%. We estimate that the overall ASP could have dropped 3% in 1QFY23.
  • We believe this is in line with the softening of global commodity prices. We view the situation of ASP deterioration slightly negative, because for a given margin (even though Ancom has the pricing power to protect its margin), a lower ASP will normally translate to a lower profit.
  • Nevertheless, it is still too early to conclude that the ASP will move towards a downward trajectory at this juncture. Given that the Bloomberg commodity index has declined 19% in early July this year from its peak in early Jun 2022, it has remained stable until now despite daily concerns on recessionary risks in the media. Notably, the index is still 35-40% higher than pre-Covid period.
  • To further move up the AI playing field after Bromacil, Ancom targets to commercialise Product T and S by early FY24F (Exhibit 2). Product T is currently selling at US$18-20/litre with Product S at US$40-45/litre as compared to existing products with an ASP in the low-to-mid single digit US$/unit. This higher ASP playing field allows Ancom to enjoy higher profit/litre amid lower competition. We estimate that these 2 AIs will contribute revenue of RM165-170mil in FY24F, translating to a 7.6-7.8% YoY growth.
  • The 1QFY23 industrial chemical segment’s huge EBIT drop of 83% QoQ to RM6mil was mainly due to ASP deterioration coupled with lower margin of 1.7% (vs 8.9% in 4QFY23). We believe this came from inventory lag effect on the segment’s predominant trading activities. Ancom guided that current inventories are mostly procured at the latest pricing. Barring unforeseen further correction in commodity prices, we believe this segment’s margin will normalise soon given the 1-month stock replenishment cycle.
  • Management highlighted several major risks that could impact our earnings forecasts over the coming quarters:
    a) Russia-Ukraine war: Ancom procures Diuron’s raw materials from Germany, which is currently suffering from abnormally high energy costs. However, Chinese peers are able to procure the raw materials from its local chemical ecosystem, allowing Chinese peers to sell at cheaper prices. To secure its market share, Ancom has to accept lower margins against these Chinese competitors. With Diuron accounting 14% of FY23F agrichem revenue, we estimate that Diuron’s gross profit margin could drop by 5%-point, translating to 4% of FY23F group earnings;
    b) Flood in Thailand: Currently, a flood has occurred mainly in Thailand’s southern region, while the northeast and central regions were largely unscathed mainly due to higher ground levels. With Thailand’s exposure to Ancom’s FY22 agrichem revenue at 8-10%, the majority of these sales stemmed from the central (50%) and northeast (35%) regions. As the flood is expected to subside in Nov or Dec 2022, this implies a loss of revenue for 1-2 months in the southern region, translating to RM1-2mil (or 0.1% of FY23F revenue). However, we caution that the flood may deteriorate or prolong beyond Dec 2022.
    c) Recessionary risks: Ancom guided that recession risks will not have much impact to agrichem given that herbicides are considered non-discretionary or necessities in the production of food supply. However, this will impact industrial chemicals segment, which accounted for 45% of FY22 EBIT, which moves in tandem with economic activities.
• Barring further deterioration of these risks, we believe Ancom will continue to benefit from the ban of paraquat in Malaysia, Thailand and Brazil in FY23F. Over the medium-to-longer term, the introduction of new agricultural active ingredients will further boost the group’s FY24F-25F earnings.

• The stock currently trades at a compelling FY24F PE of 9.6x, which is 24% below the 2-year forward sector average PE of 12.7x.

Source: AmInvest Research - 19 Oct 2022