AGRICORE: Building a base

Plant-based agricultural food ingredient distributor. AGRICORE is principally involved in the sourcing, distribution, and production of food ingredients. Its core business activities are segmented into two main areas: (i) sourcing and distributing plant-based agricultural food ingredients, and (ii) producing and selling food additives and fried shallots. Bulk of the group’s earnings was derived from sourcing and distributing plant-based agricultural products, which contributed 88% to the FY23 top line, while the remaining 12% came from the production and sale of food additives and fried shallots.

Growing food additive business. Food additives are functional ingredients used in food manufacturing to modify or enhance texture, taste, appearance, and other properties. Supplying to food manufacturers for food products such as frozen food, sauces and others, AGRICORE produces these additives in-house with some developed by their R&D team. Currently, AGRICORE has commercialized 37 out of the 50 developed food additive formulations. The impending launch of the remaining SKUs is expected to drive further sales growth in this segment. This trend was evident from FY21 to FY23 (see Figure 1), where the introduction of new food additives led to significant sales increases. Furthermore, a higher proportion of sales from food additives is expected to improve the group's overall margin.

Beneficiaries of stronger ringgit. Majority of AGRICORE’s purchases are denominated in USD, while sales are primarily in ringgit. This has caused margin compression during the USD rally since 2H22, with the group’s FY23 GP margin decreased to 13.9% from FY22’s 15.8% as the group could not fully pass on the higher raw material costs. In wake of the Fed’s rate cut optimism, we expect the ringgit to appreciate in 4Q24 to end at USD-MYR 4.60 (vs YTD: 4.72). The appreciation in the ringgit will improve the group’s margin and lead to a stronger bottom line, especially considering the low base of the group’s NP margin at 5% in FY23.

Building a base. AGRICORE is building a base at RM0.62-0.66 region. A successful breakout above RM0.67 level will signal a new uptrend and potentially propel the price toward RM0.70-0.75-0.78 levels. Cut loss at RM0.59.

Collection range: RM0.62-0.63-0.64

Upside targets: RM0.70-0.75-0.78

Cut loss: RM0.59
 

Source: Hong Leong Investment Bank Research - 1 Aug 2024