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.

• We maintain our FY23F-25F earnings after reviewing various concerns gathered from a recent survey.

• Following the recent share price decline of 20% from its peak in Feb 2023, we surveyed 8 fund managers/analysts to determine and analyse whether their primary concerns (Exhibit 1) constitute a genuine threat to our sanguine view of the stock.
   
• According to the Feedback, the Top 3 Concerns Are:
  
  (1) Collapse in China’s agrichemicals prices could impact average selling prices (ASP) of the group’s agrichemicals segment;
  
  (2) Slowdown in Global Economy Could Impact Demand for Industrial Chemicals and Agrichemicals;
  
  (3) Possibility of commissioning delays in the manufacturing of Product T and S from current schedule.
   
• For the first concern, selling prices for generic active agrichemical ingredients (AIs) e.g. Glyphosate, Glufosinate and 2.4-D (Exhibit 2) have declined by 52%-76%, according to AgriBusiness Global.
   
• This was primarily attributed to Chinese agrichemical manufacturers expanding capacity (15% YoY in 2022) coupled with lower demand as a result of overstocking by customers who overbought in 2020-21 and “China+1” strategy in which Western customers procure from other countries.

• However, the ASPs for Ancom’s top 4 AIs ie. Monosodium Methanearsonate (MSMA), Diuron, Timber Preservatives and Monex HC/Dasaflo (collectively account for 80% of FY22 agrichemical sales) decreased by only 10%-15% from their peaks in Jun-Dec 2022. We believe that the lower correction was primarily due to the group’s AIs mainly targeting niche markets with limited supplies (Exhibit 3), and customers do not experience overstocking issues to the same extent as China's agrichemicals.

• We believe that the recent declines in Ancom’s ASPs are more attributable to the volatility of crude oil prices in 2H2022 given that crude oil is these products’ primary raw material.

• Nevertheless, crude oil price has stabilised in the range of US$70-90/barrel since late 2022. Going forward, we believe ASPs for the agrichemicals segment to improve with our unchanged oil price forecast of US$80-90/barrel for 2023 (underpinned by the recent OPEC+ production cut).

• Most importantly, our ASP assumptions for the top 4 AIs in FY24F-25F core earnings are still lower than or equivalent to the most recent selling prices quoted to customers by Ancom.

• For the second concern, we acknowledge that there is a slowdown in the global economic expansion, with International Monetary Fund (IMF) predicting 2.8% YoY growth in 2023F (vs 3.4% YoY increase in 2022), primarily dragged by US and European economies as a result of elevated interest rates and inflation rates.

• Notably, Ancom’s industrial chemicals segment mainly serves the ASEAN market, which IMF predicts will grow at a higher rate of 4.5% in 2023F. Therefore, the decline in 2Q-3QFY23 sales volume may not be that material. Nevertheless, we are wary of the recent deterioration of economic indicators, which could prompt IMF downward revisions for the ASEAN market.

• On a positive note, we believe ASPs in this segment could be boosted by higher prospective oil price, based on our higher 2023 forecast compared to the current oil price of US$75/barrel. Hence, we expect no material deterioration in 4QFY23F from 3QFY23F.

• Even so, a global slowdown could still affect demand in the agrichemicals segment. However, Ancom indicated that order visibility is still 6-9 months presently, indicating that robust demand remains on track. We believe this is due to planters' incomes declining as a result of the global economic slowdown, causing them to spend less on expensive patented herbicides and more on cheaper generic herbicides which are sold by Ancom. Furthermore, Ancom's AIs are in limited supplies. Hence, we believe that Ancom's future agrichemical orders may increase rather than decrease in FY24F.

• For the third concern, the delays in commissioning of Product T from FY23F to FY24F and Product S from FY24F to FY25F indeed raised some investors’ concerns. However, the primary cause of the delay was the late issuance of certificate of completion & compliance (CCC) by the local authority for the new plant in Port Klang (Exhibit 4).

• As of now, Ancom guided that the group will receive CCC by this month and expect to commercialise Product T by Dec 2023 (2HFY24F).

• We estimate that the earnings shortfall caused by the delays as compared to our forecasts could be -6% in FY24F and -4% in FY25F. Nevertheless, these could be fully covered by stronger sales of MSMA-related products (i.e., Monex HC and Dasaflo) and new potential orders 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 Nov 2023-Jan 2024. Hence, we maintain our FY23F-25F earnings forecasts.

• In conclusion, we believe the market has overpriced the top 3 risks. We believe the successful commercialisation of Product T in Dec this year will reignite investor interest. The stock currently trades at an unjustified FY24F PE of 10x, half of its 5-year mean of 21x, for the largest agrichemical manufacturer in ASEAN.

Source: AmInvest Research - 15 May 2023