ANCOMNY remains confident on better FY23F despite intensifying competition and unfavourable weather conditions that could jeopardise the planting season, dampening demand for herbicides. However, rising sales volumes of high-margin products should cushion soft ASP (which could also recover in tandem with firmer oil prices). We maintain our forecasts, TP of RM1.80 and OUTPERFORM call

ANCOMNY hosted its 3QFY23 results briefing yesterday and the key takeaways are as follows:

i. Competition in the agricultural chemical space has intensified with the return of Chinese exporters to the international market after China’s reopening. This has weighed down on ASP for most of the group’s chemical products. However, ANCOMNY is able to manage the situation better wielding a slight pricing power as the sole active ingredient producer in Southeast Asia. Furthermore, there are only a handful of competitors in the region for its other products. It remains confident on better FY23F.

ii. The decline of its industrial chemical division’s 9MFY23 operating profit by 43.4% despite flattish revenue was mainly due to weakened global demand and was line with the downtrend in oil prices. Oil prices have since recovered following the recent move by OPEC+ to cut production by 1.1m bbl/day. An uptick in prices of industrial chemicals in tandem with firmer oil prices should boost the division’s earnings from 4QFY23.

iii. There is a concern that the onset of “El Niño” in certain regions over the next six months could jeopardise planting conditions and hence dampen the demand for herbicides. Nonetheless, we believe this could be cushioned by the introduction of new product “T” in 1HFY24, and rising sales volumes of higher-margin products such as Bromacil and Ester.

iv. ANCOMNY is not ready to commit itself to a dividend policy as yet, but may do so once its net gearing is reduced significantly from 0.5x as at end-Feb 2023.

All in, we reiterate our earnings forecasts and 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 - 20 Apr 2023