Investment Highlights

• We maintain BUY call on Ancom Nylex (Ancom) with an unchanged fair value (FV) of RM1.44/share based on a target CY24F PE of 14x (Exhibit 2), 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 deem Ancom’s 1QFY24 core net profit of RM20mil as within expectations, accounting for 22% of our FY24F net profit and 20% of street's. The commercialisation of Product T in Dec 2023-Jan 2024 is anticipated to support a stronger 2HFY24F core earnings. Pending an analyst briefing later today, we maintain our FY24F-26F earnings forecasts for now.

• No interim dividend has been declared for this quarter, which is in line with our expectations as the group remains on a capexdriven expansionary trajectory to introduce new product lines.

• On a YoY basis, Ancom’s 1QFY24 revenue decreased by 11% to RM487mil from RM550mil in 1QFY23. The weaker revenue was mostly from agrichemical (-21%) and industrial chemical (- 11%) segments, which were impacted by lower average selling prices (ASP) and weaker sales volume for industrial chemicals due to sluggish economic growth amid softer Brent oil prices.

• However, 1QFY24 core net profit remained flattish YoY at RM20mil, primarily supported by the agrichemical segment, which registered a 16% growth in EBIT due to a 5%-point increase in EBIT margin as a result of better product mix and operational efficiency underpinned by a higher plant utilisation rate.

• On a QoQ basis, Ancom’s 1QFY24 core net profit increased by 20% despite a marginal 2% increase in revenue. The stronger core net profit was predominantly attributed to higher revenue share of higher-margin agrichemicals segment from 27% in 4QFY23 to 32% in 1QFY24, owing to stronger sales volume QoQ.

• In FY24F, we expect agrichemicals segment to benefit from:
  
  (a) trade diversion by multinational corporations from China to Ancom,
  
  (b) shift in demand from expensive patented herbicides to cheaper generic versions amid an expected global economic slowdown,
  
  (c) commercialisation of Product T in Dec 2023 or Jan 2024, and
  
  (d) better oil price trajectory since late-Jun 2023 (+25%), which should also support higher product price for the industrial chemicals segment.
   
• The stock currently trades at an unjustified CY24F PE of 11x, almost half of its 5-year mean of 21x, for the largest agrichemical manufacturer in ASEAN.

Source: AmInvest Research - 18 Oct 2023