ANCOMNY is acquiring a 70% stake in industrial chemical distributor, H.J. Unkel Chemicals Sdn Bhd (HJUC) for RM9m cash, that comes with a profit guarantee of RM2.5m each for FY24-25. We are positive on the acquisition as HJUC’s chemical distribution network complements ANCOMNY’s raw material procurement process. We maintain our forecasts (as earnings enhancement from the deal is immaterial), TP of RM1.80 and OUTPERFORM call.

Reinforcing its supply chain. ANCOMNY is proposing an acquisition of 70% equity stake in HJUC from H.J. Unkel (M) Sdn Bhd (HJUM) and another two individuals (collectively referred to as Vendors) for a cash consideration of RM9m. As an industrial chemical distributor in Malaysia, HJUC supplies chemical substances to a wide range of industrial clients, namely the agrochemicals sector, rubber & gloves, and plastic industry, etc. The deal is expected to be completed by 1QFY24 and comes with a profit guarantee of RM2.5m for both FY24 and FY25.

The price tag of RM9m values the business at 5.1x FY24F PER, which is higher than the forward PER of Bursa-listed industrial chemical distributor, TEXCHEM which is trading at 4.4x FY24F PER. We believe the premium over TEXCHEM is justifiable due to HJUC’s broader clientele across different industries, compared to TEXCHEM which only focus on the plastic and polymer industry.

This acquisition will be financed by internally generated funds and bank borrowings. While we are unable to ascertain the quantum ANCOMNY will leverage on borrowings, we believe its debt level is still highly manageable, back by net gearing of 0.23x as at end-2QFY23.

We are positive on the acquisition which will enhance the group’s procurement process with better raw material control and supply security. As per company guidance, we gather that HJUC will supply input materials, namely adjuvant and surfactant which are highly essential to ANCOMNY for the manufacturing of its formulated products, i.e. 2,4-D and Glyphosate. Hence, ANCOMNY would be able to source the input materials at a lower cost as well as benefiting from the chemical distribution business.

Forecasts. The acquisition will increase ANCOMNY’s FY24-25F net profit by c.1.6% each.

We maintain our TP of RM1.80 based on FY24F PER of 15x, at a 30% discount to the forward PER of its regional agriculture chemical peers of 22x to reflect its smaller market capitalisation. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see page 4).

We continue to like ANCOMNY for its position as: (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. Maintain OUTPERFORM.

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

Source: Kenanga Research - 13 Apr 2023