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 1HFY24 core net profit of RM42mil as within our expectation, accounting for 47% of our FY24F net profit. However, the result fell slightly short of street’s expectation, accounting for 45%, as we anticipate the commercialisation of Product T to contribute a stronger 2HFY24F core earnings. Pending an analyst briefing later today, we maintain FY24F-26F earnings for now.

• Ancom declared a dividend-in-specie by distributing treasury shares to shareholders on the basis of 1 treasury share for every 100 Ancom shares. This could imply a slight increase of 9.5mil or 1% in the number of outstanding shares.

• On a YoY basis, Ancom’s 2QFY24 revenue decreased by 5% to RM505mil from RM531mil in 2QFY23. The weaker revenue was mostly from agrichemical (-18% YoY) and industrial chemical (- 5% YoY) 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, 2QFY24 core net profit was flattish YoY at RM22mil, primarily offset by the agrichemical segment, which registered a 16% growth in EBIT due to a 4%-point increase in EBIT margin as a result of better product mix and operational efficiency underpinned by a higher plant utilisation rate. Furthermore, industrial chemical segment registered an astounding 88% increase in EBIT due to doubled EBIT margin from 1.2% to 2.5% from lower cost prices.

• On a QoQ basis, Ancom’s 2QFY24 core net profit increased by 11% despite a marginal 4% increase in revenue, which was mainly contributed by the industrial chemical segment. The stronger core net profit was predominantly attributed to lower effective tax rate of 19% vs 29% in 1QFY24, resulting in a 1HFY24 tax rate of 24%, consistent with our FY24F effective tax rate assumption.

• In FY24F, we expect agrichemicals segment to benefit from:
  
  (a) trade diversions 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, and
  
  (c) commercialisation of Product T in 2HFY24F.

• 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 Jan 2024