Ancom is an integrated chemicals group and a leading manufacturer and supplier of both agricultural and industrial chemical products. The group plays a key role in global food security with more than 50 years of track record. We deem the group to be a growing agrichemical powerhouse and is seemingly undervalued at this juncture. With that, we ascribe an indicative fair value of RM1.53 for Ancom – based on a conservative target P/E of 15x – at a c.25% discount to its peers’ weighted average P/E multiple of 20x.

Agricultural chemicals – part of a bigger picture for food security. The United Nations projects that the world’s population would grow from 7.7 billion in 2019 to reach 8.5bn in 2030, 9.7bn in 2050 and 10.5bn in 2100. Coupled with the fact that land is a scarce resource and with time, there is an increasing importance of growing reliable and consistent food supplies to have sustainable and long-term food security – inevitably increasing demand for good quality pesticides. Ancom’s active ingredients (AI) are used in growing the food we eat and is the sole agrichemical AI producer in Southeast Asia and one of the largest in the Asia Pacific.

Benefitting from Paraquat ban in Thailand and Brazil – one man’s herbicide is another man’s poison. Paraquat, a deep-rooted herbicide was banned in both Thailand and Brazil in 2020 as it was classified as a class-1 poison and it was primarily used for weed and grass control. Given its highly poisonous nature, Paraquat was widely used for suicidal reasons. From our findings, the Paraquat replacement in Thailand is estimated to range from USD60-80m annually while the global market size of Paraquat was estimated to be around USD850m in 2020. As two of Ancom’s formulations – Dasaflo and Monex HC are identified as close substitutes to Paraquat, the group’s exports to Thailand have increased significantly in 2021 and 2022. We note that the group is also working on getting both formulations to Brazil for the soybean industry – which has a Paraquat replacement market of about 5x larger than Thailand. Ancom is also increasing its capacity for existing MSMA-based products by 25% to meet the increasing demand resulting from the ban (target completion: Oct 2022).

Expanding annual capacity by 9.5% for two more AIs. The group is building a new 70k sq ft facility on the land adjacent to its existing plant in Klang – which will boost the group’s annual capacity by 4kMT (additional 9.5%). The new facility is slated for commencement in early 2023. Ancom plans to use this new facility to produce 2 new AIs (Chemicals T and S) with a targeted rollout in 2H23 (See Figure #7-8).

Highly specialised AIs and the nature of business has a high barrier to entry. As shown in Figure #2, Ancom’s AIs are highly niche and specialised in nature – making them difficult to replicate or replace. The nature of the herbicide business also has a high barrier to entry and we highlight that Ancom is the sole agrichemical AI producer in Southeast Asia.

Impressive earnings growth with no signs of slowing down. Ancom raked in a record high core net profit of RM62.6m in FY22. Going forward, we project the group’s net profits to further grow by 22%, 45% and 18% for FY23-25f respectively – representing a CAGR of 28%, based on our projections.

Indicative fair value of RM1.53 – NOT RATED. Our indicative fair value of RM1.53 is derived from FY24f (FYE May) earnings with a conservative target P/E of 15x – at a c.25% discount to its peers’ average P/E of 20x (see Figure #14) to reflect its relatively smaller market capitalisation vs its peers.

Source: Hong Leong Investment Bank Research - 6 Oct 2022