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.

• Pending an analyst briefing later today, we maintain our earnings forecasts for now as Ancom’s 9MFY23 core net profit of RM58.2mil generally came in within our expectation, accounting for 74% of our FY23F net profit, but slightly above consensus, accounting for 78% of consensus.

• No interim dividend has been declared in this quarter, which is in line with our blank FY23F-FY25F assumption as the group remains on a capex-driven expansionary trajectory to introduce new product lines.

• On a YoY basis, Ancom’s 3QFY23 revenue registered a decline of 5% to RM484mil from RM510mil in 3QFY22. Consequently, 3QFY23 core net profit decreased by 2% to RM15.9mil from RM16.1mil in 3QFY22. The weaker earnings were mostly related to the industrial chemicals segment, which experienced lower revenue (-19% YoY) and EBIT margin of 1.6% (-0.8ppt YoY) owing to lower average selling prices (ASP).

• On a QoQ basis, Ancom’s 3QFY23 core net profit decreased by 30%, in tandem with a 9% contraction in revenue. The weaker revenue was primarily attributed to agrichemical (-24% QoQ) and industrial chemical (-10% QoQ) segments, while the earnings decline was solely due to agrichemicals.

• The agrichemicals segment experienced a decrease in ASP as a result of falling crude oil prices (-9% QoQ), while sales volume was unchanged.

• Separately, the industrial chemicals segment experienced a decline in both ASP and sales volume amid lower crude oil prices and weaker global economic activities. Nevertheless, oil prices remained stable post-3QFY23.

• Notably, industrial chemical EBIT improved by 16% QoQ, mainly driven by a greater contribution from higher-margin manufacturing segment, particularly the ethanol segment.

• Going forward, we expect the agrichemical segment to be slightly weaker in 4QFY23 due to lower sales volume which could be impacted by crop prices (-2% QoQ). However, the industrial chemicals segment should be stronger on higher ASP and stable sales volume, based on our unchanged oil price forecast of US$80-90/barrel for 2023 compared to the average oil price in March 2023 of US$80/barrel.

• 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 11x, half of its 5-year mean of 21x, for the largest agrichemical manufacturer in ASEAN.

Source: AmInvest Research - 19 Apr 2023