ANCOMNY’s FY23 results met our forecast but missed market expectations. The performance was monumental with core net profit growing by 52% YoY on higher agri-chemical volumes, better earnings from the logistics business, and group gearing nearly halved. Capacity expansion and new products at its agri chemical business will spur growth over FY24-25. We maintain our forecasts, TP of RM1.80 and OUTPERFORM call.

FY23 core net profit of RM70.1m came in within our forecast but missed consensus estimate by 7%. 4QFY23 core net profit slipped to RM11.5m (-31% QoQ, +9% YoY) on softer selling prices of agri chemicals due to competition but was offset by lower costs; hence, agri-chemical PBT stayed firm. Industrial chemicals did better QoQ and but weaker YoY on an inflated comparative base due to a RM24m disposal gain but the overall margins of 2-3% was still poor. A YoY swing from investment gain of RM35.7m gain a year ago to a loss of RM3.5m in 4QFY23 (vs. RM0.2m loss in 3QFY23) further dampened the final quarter’s margin. Nevertheless, all in all, FY23 was a stellar year with robust demand for agri-chem products such as those replacing Paraquat in Thailand, Brazil and Malaysia along with two new products launched a year ago. Profit from logistics also fared well

Its strong earnings outlook is intact, underpinned by multiple earnings drivers:

1. Healthy demand for its core agri-chemical products, especially monosodium methane arsonate or MSMA-based products which are gaining from the phasing out of Paraquat in markets such as Thailand, Brazil and Malaysia where ANCOMNY has a long presence. Competition is intensifying but is looking manageable with profitable growth trajectory ahead.

2. Expansion and broadening of its agri-chem portfolio. ANCOMNY launched two new agri-chem products, Bromacil and Ester for pineapple and cereal in FY22. It is now building capacity to launch two to three more products over FY24-25.

3. Consolidation of its logistics arm should also bear fruit. In Oct 2022, ANCOM paid RM8m altogether to increase its effective stake in Ancom Nylex Terminal (ANT) from 17% to 66%. ANT owns 48 tanks (44,100m3) in Westport, Selangor.

4. Acquiring adjacent expertise or assets such as HJ Unkel Chemicals to strengthen procurement as well or acquisition of animal-health related asset (Shennong) in Dec 2021.

Forecasts. Maintained.

We also keep our TP of RM1.80 based on FY24F PER of 15x, at a 30% discount to the average forward PER of regional agriculture chemical peers of 22x to reflect its smaller market capitalization. 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, and (iii) foreign exchange translation risk.

Source: Kenanga Research - 17 Jul 2023