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 based on the assumption that increasing use of generic traditional pesticide active ingredients (AI) will be a long-term ongoing structural trend.

• As the sole large-scale generic herbicide AI manufacturer in South East Asia (SEA), we believe Ancom is well-positioned to capitalise on the increasing market share of generic pesticide AI, as well as the loss of intellectual property rights for 20 pesticide AI in 2021-26 with a total market value of US$5.2bil, based on 2019 sales data.

• This is 21% higher than the total market size of only US$4.3bil for pesticide AI patents that expired in 2015-19.

• For the increasing of use of generic traditional herbicide AI, Ancom guided that Monosodium Methanearsonate (MSMA) (developed in 1965) and Diuron (1954) are 2 herbicides AI that are effective against glyphosate-resistant weeds for sugar cane and cotton in USA, Brazil, and Mexico; alongside with cocktail products i.e., Monex HC and Dasaflo for sugar cane and oil palm in Malaysia and Thailand.

• Notably, Ancom is currently developing 2 new cocktail products for the treatment of glyphosate-resistant weeds for regions other than ASEAN. These 2 new cocktail products have not been factored in our earnings in FY24F-26F.

• Going into FY24F, we expect Ancom’s 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-June 2023 in line with our in-house 2023F oil price of US$83/barrel (vs US$80/barrel YTD2023).

• Similarly, Ancom’s industrial chemicals segment should be stronger on higher average selling prices (ASP) in light of a favourable oil price trajectory and stable sales volume as this 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 - 26 Jul 2023