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 adjustment based on an unchanged 3-star rating.

• Our earnings forecast is maintained given the negligible impact from the acquisition of industrial chemical distributor, H.J. Unkel Chemicals (HJU Chemicals), for a consideration of RM9mil.

• Yesterday, Ancom entered into an agreement with H.J. Unkel (M), Chong Sau Kin and Ye Suping to acquire a 70% equity interest in HJU Chemicals for a cash consideration of RM9mil. The acquisition should be finalised within 3 months from the date of agreement.

• HJU Chemicals was founded in 2009 as a distributor of industrial chemicals focusing on the Malaysian market. The company has a diversified customer base with exposures to agrichemicals, construction materials, cosmetic, leather & textile, paint & coatings, plastics & masterbatch, polish, printing ink, rubber and gloves.

• The 2 most prominent customers of HJU Chemicals are CCM Chemicals and GOVI Chemicals, highlighting the recognition accorded to the company by industrial chemical players. In the past 3 years, HJU Chemicals has consistently generated PAT of RM2.3mil-2.6mil per year.

• Notably, the chief executive officer (CEO) of HJU Chemicals provided an irrevocable PAT guarantee of RM2.5mil in FY24F and FY25F, providing visibility to earnings contribution. However, this could only increase Ancom’s earnings slightly by 2% in FY24F and 1.5% in FY25F.

• Nevertheless, we regard HJU Chemicals' acquisition PE of 4.9x as a bargain in comparison to Ancom's FY24F PE of 10.4x. There will be no material increase in gearing from this acquisition in view of the relatively small size of the acquisition.

• We view this acquisition in line with the group’s intention to become one of the major integrated chemical groups in the Southeast Asian region.

• 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-long term, the introduction of new active agrichemical ingredients will further underpin the upward trajectory of the group’s FY23F-25F earnings.

• The stock currently trades at an unjustified FY24F PE of 10.4x, half of its 5-year mean of 21x, for the largest agrichemical manufacturer in ASEAN.

Source: AmInvest Research - 13 Apr 2023