Investment Highlights

• We maintain 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 PE mean for 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:

• Management expects the agricultural chemicals (agrichem) segment’s 2HFY23 EBIT to be comparable to 1HFY23, mainly underpinned by robust demand for monosodium methanearsonate (MSMA)-related products (ie. Dasaflo and Monex HC) due to the paraquat ban in Thailand since 2020, coupled with the introduction of new products, Bromacil and Ester.

• Separately, we expect the industrial chemicals’ 2HFY23 EBIT to be comparable to 1HFY22, based on our unchanged forecast of US$80-90/barrel for 2023.

• The agrichem segment’s 6% QoQ revenue decline was primarily attributable to lower average selling price (ASP), which is in line with the commodity price trend. However, demand from Thailand is still robust.

• Hence, Ancom is adding 2 more reactors to its existing 7 reactors by 1QCY23F to cater to the strong demand for MSMA-related products resulting from Thailand’s paraquat ban.

• The demand for the newly commercialised active ingredients (AI), ie. Bromacil and Ester, have been gradually increasing. To recap, Bromacil was commercialised in 3QFY22 and marked the group’s advancement to higher ASP playing field on par with global big players.

• Going forward, Ancom targets to commercialise Product T and S in FY24F (Exhibit 1). Product T is now selling at US$18- 20/litre and 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 market allows Ancom to enjoy higher profit/unit 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 that has already been incorporated in our assumptions.

• Separately, Ester was commercialised in 1QFY23 to capitalise on opportunities created by geopolitical tensions between Australia and China. Currently, the Australian government imposes a substantive tariff of 23%-35% on Chinamanufactured Ester while Malaysian exporters enjoy tarifffree status.

• Moreover, in light of the ongoing geopolitical tension between the USA and China, Ancom has recently received interest from a USA-based corporation which aims to diversify 50% of its Ester supply from China to Malaysia. We anticipate the orders to arrive in FY24F.

• We believe Ancom will continue to benefit from the ban on paraquat in Malaysia, Thailand and Brazil as well as the introduction of Bromacil and Ester in FY23F. Over the medium-to-longer term, the introduction of new active agrichem ingredients will further boost the group’s FY24F-25F earnings.

• The stock currently trades at a compelling FY24F PE of 11.4x, which is 10% below the 2-year sector average P/E of 12.7x.

Source: AmInvest Research - 19 Jan 2023