We recommend ADD for ANCOMNY with an FV of RM1.77. ANCOMNY is the sole producer of agrichemicals' active ingredients (AIs) in Southeast Asia and a key player in Asia. Founded in 1969, it has since expanded into the production of industrial, polymer and livestock chemicals. Currently, agrichemicals AIs contribute to >70% of its group PBT.

In 2020, Malaysia, Thailand and Brazil joined 29 other countries in banning the use of paraquat, a widely used herbicide that is highly toxic to people and animals. ANCOMNY is a beneficiary of the paraquat ban as its MSMA-based AI is a close but safer substitute. Its FY22 overseas sales surged 58% YoY as orders from Thailand almost doubled whilst overall exports, including to the US, Brazil and Australia, continued to climb. The aim is to grow its 10% presence in Thailand further while strengthening its distribution network in Brazil. Within the MSMA-based AI segment, ANCOMNY has only one competitor worldwide as legal, regulatory and technical barriers into the herbicide AI segment are high. Meanwhile, the group has added two more AIs in FY22, and a new plant is already under construction. Dedicated to the production of higher margin AI products, the new facility is expected be completed in early CY23 (i.e. 2H of FY23F).

The takeover of Nylex (Malaysia) Bhd’s entire operations in Jan 2022 has allowed the group to consolidate and scale up its industrial chemical’s operations. Coupled with favourable prices, industrial chemicals PBT jumped 123% YoY in FY22 to RM58m. Moving forward, a full recognition of Nylex’s earnings along with better cost control should see higher contribution from the industrial chemical segment. Likewise, the polymer segment is likely to enjoy better scale, cost management and earnings.

ANCOMNY has also been streamlining its various investment holdings. Loss-making media investments have been pared down, hence a smaller operating loss of RM15m is likely over FY23F-24F compared to a RM42m loss in FY22. Meanwhile, the group has increased its stake in the logistics-cum-chemical tank farm business under Ancom-Chemquest Terminals Sdn Bhd (ACT) to 42% from 17%. In June 2022, the group also bought 80% of Shennong Group for RM24m to gain a foothold in the growing livestock solution segment. Following the takeover of Nylex’s business and the restructuring of its listed chemical logistics arm, the group currently has two listed shell companies. One of them, Nylex (Malaysia) Bhd, is part of the Johor Bahru LRT consortium while the other, Ancom Logistics Bhd, is awaiting a fresh proposal after a previous corporate exercise lapsed

We expect an EPS growth of 38%/48% over FY23F/FY24F, mainly driven by its expanding agrichemical business. Not only are its existing AIs growing well, the group is also introducing more AIs as well as entering new markets. Competition in the industry is limited due to high entry barriers. Demand for the products will be underpinned by the global goal of achieving food security. Oil palm, sugar cane, grains and even fruits such as pineapples are some of the food crops that could use ANCOMNY’s agrichemicals in their cultivation.

Its FY23F and FY24F earnings growth should be robust backed by its growing market share in Thailand’s paraquatreplacement market that worth an average US$70m a year, a reflection of its enhanced distributing network. Also, the commencement of a new plant is anticipated to lift its AI capacity by another of 50%, thus contributing to the scale and margin improvement in FY24F. Furthermore, ANCOMNY's newly acquired livestock chemicals business can bring in a PATAMI of RM4m annually which is backed by a profit guarantee.

ADD with a fair value of RM1.77, premised on a 15x FY24E PER, which is at a 25% discount to its regional agrichemical peers’ two-year forward PER mean of 20.3x. This is reflective of its smaller market capitalization and lower ROE of c 17% compared to its peers' 21%. We believe the valuation is inexpensive given the stock’s higher earnings growth potential (38%/48% in FY23F/FY24F) compared to peers' average earnings growth (25%/16% in FY23F/FY24F) relative to the market (i.e. FBMSCAP’s single-digit EPS growth). While prospects for dividend payment is uncertain for now, a payout policy could be drafted in FY24.

Source: Kenanga Research - 13 Oct 2022