Investment Highlights

• We maintain our BUY call on Ancom Nylex (Ancom) with an unchanged fair value (FV) of RM1.43/share. This is pegged to an unchanged target FY24F PE of 14x, 0.75 standard deviation (SD) below its 5-year mean of 21x. No ESG-related FV adjustments based on an unchanged 3-star rating.

• Our earnings forecasts are maintained given the negligible impact to Ancom from the recent flood and cyclone in New Zealand, as there will be no shipments to the country in the near months based on current order-book. At this stage, the possibility of an increase in orders for timber preservatives should be negligible and too preliminary.

• According to Bloomberg, New Zealand Northern Island received nearly an entire summer’s worth of rainfall in just 15 hours, causing severe flooding in the region (Exhibit 1) in late-Jan 2023. According to the National Institute of Water and Atmospheric Research (NIWA), a total of 166mm (6.5 inches) of rain fell during the course of 15 hours, accounting for 79% of the region's average summer rainfall.

• The flood has inflicted substantial damages, including the loss of 4 lives, destruction of thousands of homes and significant disruptions to traffic and business operations.

• Even worse, Cyclone Gabrielle (Exhibit 2) struck Northern Island only 2 weeks after the unprecedented downpours and flooded the same region again, which killed at least 5 people at this juncture. On 15 Feb 2023, the cyclone weakened and moved away from New Zealand.

• On a positive note, New Zealand only accounts for 2% of Ancom’s agricultural chemical (agrichem) revenue in FY22. The majority of the sales consisted of timber preservatives utilised in the construction and painting industries. In addition, there will be no shipments to New Zealand in the coming months based on the current order-book. Thus, we believe there will be negligible impact to our FY23F net profit forecast.

• Historically, post-flood conditions have resulted in increased sales of timber preservatives during the reconstruction phase in New Zealand. For instance, Cyclone Bola in 1988 generated millions of dollars in rebuilding costs. According to Reuters, while it is too early to estimate the flood’s and Gabrielle’s rebuilding costs, analysts and economists indicate that will likely reach billions of dollars. Hence, while demand could increase for Ancom’s timber preservatives, the impact is likely to be insignificant given the relatively low scale from this region’s sales.

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

• The stock currently trades at a compelling FY24F PE of 12.1x, implying a 14% discount to 14x, which is 0.75 SD below its 5-year mean of 21x.

Source: AmInvest Research - 20 Feb 2023