Investment Highlights

• We maintain our BUY call on Ancom Nylex (Ancom) with a higher fair value (FV) of RM1.43/share. This is pegged to a target FY24F PE of 14x, 0.75 standard deviation (SD) (from 1 SD previously) below its 5-year mean of 21x. We apply a lower SD due to more stable commodity markets recently. No ESGrelated FV adjustments based on an unchanged 3-star rating.

• Our earnings forecasts are maintained following the imminent commercialisation of 2 monosodium methanearsonate (MSMA)-related reactors and the arrival of 9 reactors to manufacture a new active agricultural chemical ingredient (AI) named Product T. We deem these developments as within our expectations.

• Based on our checks with Ancom, 9 new reactors (Exhibit 1) to be used to produce a new AI with a total capacity of 1k MT/annum have arrived last week. The new AI is tentatively known as Product T. We expect these reactors will be commercialised in 2HFY24F.

• To recap, the major earnings driver for the group in FY24F- 25F lies in moving towards higher average selling price (ASP) market niches in the agricultural chemical (agrichem) landscape by commercialising Product T and S (Exhibit 2). Product T is now selling at US$18-20/litre and Product S at US$40-45/litre as compared to existing products which carry ASPs in the low-to-mid single-digit US$/unit.

• This higher ASP playing field allows Ancom to enjoy higher profit/unit given the lower competition. We estimate that Product T will contribute revenue of RM80mil-RM85mil in FY24F, translating to a 3.7-3.9% YoY revenue growth that has already been incorporated in our assumptions.

• Separately, an additional 2 new reactors for the manufacturing of existing AI named MSMA arrived in Dec 2022. After the installation of these reactors, the total count of MSMA-related reactors will increase from 7 previously to 9 (+29%), excluding the units for other products. According to Ancom, the 2 additional reactors will be commercialised by Feb 2023.

• To recap, the rationale behind the expansion of MSMA-related capacity is to tap on rising demand driven by the ban on paraquat, especially in Thailand since 2020, given its negative health and environmental impact.

• According to news report from The Strait Times, following the ban on paraquat, Thailand will experience a significant agronomic impact leading to a 3x increase in production cost and 20–30% dip in overall agricultural produce. The replacement market for paraquat in Thailand is estimated to be worth USD60–80mil a year.

• Ancom has identified 2 of Ancom’s MSMA-based formulations, Dasaflo and Monex HC, as close substitutes for paraquat (Exhibit 3). Hence, demand for MSMA-based products, which is one of the closest paraquat replacement available in the market, has increased significantly since FY22.

• In the near term, we believe Ancom will continue to benefit from the ban on paraquat, especially in Thailand and Malaysia. Over the medium-to-longer term, the introduction of new AIs will further underpin the upward trajectory of the group’s FY23F-25F earnings.

• The stock currently trades at a compelling FY24F PE of 12.4x, implying an 11% discount to 14x, which is 0.75 SD below its 5-year mean of 21x.

Source: AmInvest Research - 7 Feb 2023