Investment Highlights

• We maintain 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 forecasts are maintained following an analyst briefing yesterday. These are the salient highlights:
  • Ancom guided that the sales of monosodium methanearsonate (MSMA)-related products remain robust in FY23F (+18%-22% YoY). To its existing 7 units, the group added 2 more reactors, which will start operation in May 2023 to meet strong demand for this product line due to Thailand’s paraquat ban since 2020.
  • In addition, the group has been working to expand the registration of MSMA-related products from existing sugarcanes to soybeans in Brazil. The results of the first trial in the country was favourable while the second will be released in May 2023. If this is acceptable, the group will apply for soybean labelling in Jul 2023, a process that will take another 2 years for commercialisation.
  • Hence, we will only see contributions in FY26F onwards, which could be substantive. According to Statista, soybean farming accounted for 41mil hectares of Brazil's planted acreage, 5x sugarcane’s 8.3mil hectares.
  • On the other hand, after commercialising Bromacil in 3QFY22, which marked the group’s advancement to a higher average selling price (ASP) playing field, on par with big global players. Ancom targets to begin producing Product T in FY24F and S in FY25F (Exhibit 1).
  • Management indicated that Product T is now selling at US$15- 17/litre and Product S at US$40/litre as compared to existing products with an ASP in low-to-mid single-digit US$/unit. This higher ASP market allows Ancom to enjoy higher profit/litre amid lower competition in a less congested segment.
  • Factory C for Product T (Exhibit 2), with an initial capacity of 1K MT/annum (which can scale up to a max 3K MT/annum), will receive the certificate of completion & compliance (CCC) by July 2023, with the goal of commencing production by end- 2023.
  • Factory B for product S (Exhibit 2), with an initial capacity of 500 MT/annum (which can scale up to a max 1.5K MT/annum), will also receive the CCC by July 2023 and is currently at the stage of purchasing equipment. Installation will be completed by 1Q2024 and production commence in FY25F.
  • To recap, Ancom introduced Ester in 1QFY23 to capitalise on opportunities arising from geopolitical tensions between Australia and China. Currently, the Australian government imposes a substantive tariff of 23%-35% on Chinamanufactured Ester while Malaysian exporters enjoy tariff-free status.
• Against the backdrop of US-China trade tensions, the US government currently imposes a 20% tariff on Ester manufactured in China. Ancom has recently received interest from a US-based corporation which aims to diversify 50% of its Ester supply (1.5mil-2mil litres) from China to Malaysia. We understand that maiden orders could arrive in November 2023-January 2024, which will support the group’s overall earnings growth even though GP margins for ‘tolling’ activities will be 3%-5%-point lower than full manufacturing’s 15%.

• 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 - 20 Apr 2023