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 1), 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 FY24F-26F earnings following a result briefing yesterday. However, we introduce DPS of 1.5 sen in FY24F, 2.0 sen in FY25F and 2.5 sen in FY26F following Ancom’s guidance on distributing dividends on a semi-annual basis from FY24F onwards given a substantively improved net gearing ratio of 0.37x in 1QFY24 compared to its peak of 0.9x in last 5 FYs. Even so, management reaffirmed that capex-driven expansionary activities will be prioritised ahead of dividends if any opportunity emerges.

• Reuters indicated the main Israeli ports of Ashdod and Haifa (Exhibit 2) remain operational despite the recent Israel-Hamas conflict which started since 7 Oct 2023. However, ships must pay an additional war risk premium for routes to Israel, which soared 10x higher than pre-conflict period.

• Furthermore, some insurance underwriters were reviewing coverage provisions for ships travelling to Ashdod in view of the possibility that vessels with ties to Israel or the United States could be attacked in Israeli territorial waters.

• On 13 Oct 2023, Lebanon's Hezbollah (northern region of Israel) said it would be “fully prepared” to join its Palestinian ally Hamas in the war against Israel when the time is right. If this materialises, the threat level for Haifa would instantly escalate (Exhibit 2).

• These may create an opportunity for Ancom to benefit from a potential supply disruption from the group's sole monosodium methanearsonate (MSMA) (1 of Ancom’s 5 active ingredients) competitor in Israel, in terms of price increase or trade diversion. MSMA accounts for 8% of 1QFY24 revenue.

• For now, Ancom guided that the group still does not observe any price increment nor trade diversion from its Israeli competitor. If the conflict worsens, Ancom is ready to increase MSMA prices and has sufficient spare capacity to fill up the 3 mil litre/annum of MSMA supply from Israel.

• Product T, which has an initial capacity of 1K MT/annum that can be scaled up to a max 3K MT/annum, should be commercialised as scheduled in Dec 2023 or slightly later in Jan 2023. For Product S, with an initial capacity of 500 MT/annum (which can be scaled up to a max 1.5K MT/annum), the group anticipates that equipment installations will be completed by 1H2024 and commercialisation will begin in 2H2024.

• Furthermore, Product T and S qualify for MIDA’s pioneer status, which will meaningfully reduce the group effective tax rate for FY24F-26F. Hence, we believe it is reasonable to continue presuming an effective tax rate of 24% for FY24F-26F for now even though that the group experienced a 1QFY24 effective tax rate of 29%.

• Ancom clarified that the higher agrichemical’s 1QFY24 EBIT margin of 16% (vs. average of 11%-12%) was predominantly attributed to the delivery of higher-margin timber preservatives (1 of Ancom’s 5 active ingredients) to a USA-based customer whose orders increased from 3-4K MT/annum in FY23 to 8-10K MT/annum in FY24F. Ancom intends to convert this spot order into a 3-year contract, which is already reflected in our FY24F-26F revenues. Meanwhile, we continue to assume a conservative FY24F EBIT margin of 14% to account for seasonality in the delivery of wood preservatives across the year.

• For industrial chemicals, the 1%-point QoQ decline in EBIT margin to 1.2% was primarily attributable to weak methanol-related product prices, despite a Brent oil rise. Nevertheless, the group expects the EBIT margin to increase if Brent oil prices maintained upward trajectory. Hence, we maintain FY24F EBIT margin of 1.7%.

• In FY24F, we expect agrichemicals 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 10x, almost half of its 5-year mean of 21x, for the largest agrichemical manufacturer in ASEAN.

Source: AmInvest Research - 19 Oct 2023