Investment Highlights

• We maintain BUY call on Ancom Nylex (Ancom) with an unchanged fair value (FV) of RM1.43/share. This is pegged to a 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 given Ancom’s FY23 core net profit of RM74.9mil generally came in within expectations, 5% below our forecast and almost on the dot to street’s. In addition, we introduce FY26F earnings with a 26% YoY growth, mainly underpinned by capacity expansions for Product T (+1K MT/annum) and S (+500MT/annum).

• A maiden interim dividend of 1.0 sen/share has been declared, implying FY23 payout of 12%, which beat our expectations given Ancom’s last dividend was paid in FY14. Nevertheless, we believe this could be one-off given the group’s continued capex-driven expansionary trajectory towards the introduction of new products T and S. We therefore maintain our zero dividend payout assumptions for FY24F-26F for now.

• On a YoY basis, Ancom’s 4QFY23 revenue registered a decline of 15% to RM478mil from RM565mil in 4QFY22. Consequently, 4QFY23 core net profit decreased by 43% to RM17mil from RM29mil in 4QFY22. The weaker earnings were mostly related to the industrial chemicals segment, which experienced lower revenue (-21% YoY) and EBIT margin of 2.3% (-0.5ppt YoY) owing to lower average selling prices (ASP) and sales volume amid lower oil prices and weakening economic growth.

• For the agrichemicals segment, 4QFY23 revenue decreased by 9% YoY, mainly due to lower ASP in tandem with lower prices of chemical intermediaries. However, the segmental EBIT improved 9% YoY due to lower operating expenses as a result of improved economies of scale in light of increased sales volume.

• On a QoQ basis, Ancom’s 4QFY23 core net profit increased by 5% despite a 1% contraction in revenue. The weaker revenue was predominantly attributed to the agrichemicals segment (- 8% QoQ), that experienced reduced ASP. However, it was offset by a lower group effective tax rate of 5% (vs 26% in 3QFY23) thanks to better tax management.

• Surprisingly, the industrial chemicals segment experienced a 7% QoQ growth in revenue, mainly driven by higher sales volume. Notably, EBIT improved by 54% QoQ, likely attributable to better cost management given a more stable oil price environment in 1H2023 compared to 2H2022.

• Going into FY24F, we expect agrichemicals segment to benefit from: (a) the ban on paraquat in Thailand and Malaysia, (b) the shift in demand from expensive patented herbicides to cheaper generic versions amid global economic slowdown, (c) the commercialisation of Product T in Dec 2023, and (d) better oil price trajectory since late-Jun 2023 in line with our in-house 2023F oil price of US$83/barrel (vs US$80/barrel YTD-2023).

• Similarly, the industrial chemicals segment should be stronger on higher ASP in light of a favourable oil price trajectory recently and stable sales volume given Ancom’s industrial chemicals segment mainly serves the ASEAN market, which IMF predicts will grow at a higher rate of 4.5% in 2023F vs 2.8% global economic growth.

• The stock currently trades at an unjustified FY24F PE of 9.8x, half of its 5-year mean of 21x, for the largest agrichemical manufacturer in ASEAN.

Source: AmInvest Research - 17 Jul 2023