We are initiating coverage on ANCOMNY with an OUTPERFORM call and a TP of RM1.80 based on FY24F PER of 15x, which is at a 30% discount to its larger international peers. We like ANCOMNY for it being: (i) the largest herbicide active ingredients (AI) producer in South-East Asia, (ii) a beneficiary of the widening ban on the paraquat use, and (iii) a proxy to global food production and food security goal.

Growing demand for paraquat alternatives. A long established and recognised manufacturer of AIs, ANCOMNY is well positioned to capture the demand for alternative products to paraquat which has been banned in many jurisdictions including Malaysia and Thailand since 2020. This was the key driver to its 58% YoY growth in FY22 exports (c.70% of total sales). Exports should continue expanding in FY23-24 as the phasing out of paraquat advances further. The group aims to capture about half the former paraquat market in Thailand by 2026 (from just 10% in 2020), or estimated sales of about RM150m/year.

New AIs, new crops and new markets. In FY22, ANCOMNY introduced two new AIs, (Bromacil and Ester) targeted at pineapples and cereal crops. The group hopes to capture around 10% of the market and potentially generate about RM50m a year on more favourable costs and competitive pricing. Over and above that, ANCOMNY plans to launch a new AI specifically for sugar cane, which should see demand from Brazil and South Africa followed by another new AI within the next year or so. Meanwhile, competition is also expected to stay manageable as ANCOMNY only targets selected products, many of which if not all are also strictly regulated products.

Timely expansion. With demand for paraquat replacement likely to increase, ANCOMNY is completing two new reactors in Shah Alam by Feb 2023. In March 2023, another AI production facility at Port Klang is also due to commence, allowing assemble of machines for the synthesis of two new AIs and expected to start contribute in FY24.

Broader, stronger income base. Since the group started restructuring around FY17 by refocusing on the higher margin agriculture chemical business and divestment of some loss-making ones, earnings have been less volatile. Moving ahead, earnings should strengthen, thanks to: (i) tailwind from paraquat bans, (ii) new AIs to serve different crops and markets, (iii) as an ex-China but Asia-based agriculture chemical suppler, and (iv) the long-term constant demand for food production.

Initiate coverage with OUTPERFORM rating with a TP of RM1.80 based on FY24F PER of 15x, which is at a 30% discount to the forward PER of its regional agriculture chemical peers of 22x. The discount reflects ANCOMNY’s smaller market capitalisation and a high net gearing of 74%. ANCOMNY is well placed to capture new markets as: (i) barrier into the business is relatively high, (ii) the group is known to many regulators given its half century plus of history in agriculture chemical AIs, (iii) being based in SE Asia, its plants are in the heart the Asia Pacific market which is the most important for agriculture chemical, and (iv) the group is still busy expanding its portfolio of AIs. All in all, robust EPS growth of 43% CAGR is likely over FY23-24, not only from operations but also from ongoing restructuring to improve margins, lower interest costs and even taxation.

Risks to our call include: (i) downturn in crop production in key markets, (ii) changes in regulation for AI acceptance, and (iii) foreign exchange translation risk.

Source: Kenanga Research - 19 Jan 2023