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.

• Our FY24F-26F forecasts are maintained following an analyst briefing yesterday.

• Management updated that the Product T, with an initial capacity of 1K MT/annum (which can scale up to a max 3K MT/annum), will be commercialised as scheduled in Dec 2023. Notably, several key metrics related to product commercialisation have been progressing well: (a) The purity of Product T at laboratory level has reached 98%, surpassing the minimum requirement of 95%; (b) The mass production yield has achieved above 80%, coming near to the commercial requirement of 85%; and (c) Arrival of a Chinese partner in early Jul 2023 ensures that mass production will proceed smoothly.

• To recap, the 9 new reactors for Product T arrived in early Feb 2023 and the factory secured the certificate of completion & compliance (CCC) in May 2023.

• We believe the arrival of the Chinese partner will be positive, likely reigniting near-term market interest in Ancom, as one of the market concerns is the possibility of commissioning delays in the manufacturing of Product T and S.

• For Product S with an initial capacity of 500 MT/annum (which can scale up to a max 1.5K MT/annum), the group assured that equipment installation will be completed by 1Q2024 and production commence in 2H2024 or early FY25F.

• We view that the introduction of Product T and S marks not only the launch of 2 new products, but also Ancom continuously moving towards a higher ASP playing field after the launch of Bromacil in 3QFY22, rising from existing single US$/KG to double-digit US$/KG. This higher ASP market allows Ancom to enjoy higher profit/KG amid lower competition in a less congested segment.

• Separately, Ancom does not anticipate that the maiden interim dividend of 1sen/share (implying FY23 payout of 12%) will be a new norm, but will continue to prioritise the use of available capital to fuel future growth. We therefore maintain our zero dividend payout assumptions for FY24F-26F for now.

• 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 an expected 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 that 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 10.1x, half of its 5-year mean of 21x, for the largest agrichemical manufacturer in ASEAN.

Source: AmInvest Research - 18 Jul 2023