After a stellar FY23, ANCOMNY expects another strong year ahead despite intense competition on the agri-chemicals front and soft demand for industrial chemicals. Prices are weak but demand for agri-chemicals has remained healthy. As the only player in SE Asia, it is also enjoying orders from customers seeking to diversify from China while new high-margin products should cushion lacklustre ASP. No change to our FY24-25F earnings, TP of RM1.80 as well as our OUTPERFORM recommendation.

ANCOMNY held a virtual 4QFY23 results briefing yesterday and among the key takeaways are as follows:

a) Agri-chemical ASP has been weighed down by Chinese exporters since about 1QFY23. However, as an established sole active ingredient (AI) producer in SE Asia, ANCOMY has some advantages in the region. Recently, Indonesian regulators approved one of its MSMA-like AI for sugar cane. ANCOMNY is seeking approval for use in oil palm trees as well. ANCOMNY has also received “trial” orders from a new US customer trying to reduce over-reliance on the Chinese supply chain. Global competition for its AI is also limited as ANCOMNY tend to target AIs with only a handful of players so as to better manage margins and growth.

Specific to FY24, El Nino which brings dryness to SE Asia but rain in southern parts of US and Brazil may alter the usual demand pattern. As rain prompts greater need for herbicide, demand from Brazil for the group’s MSMA-related products has strengthened YoY thus far but orders from SE Asia could weaken slightly or stay flat.

b) Orders for two new AIs launched in FY22, Bromacil and Ester, are encouraging and the momentum should continue over FY24-25F. Meanwhile, trial runs on another new AI, Product “T” has started and the results have been positive with faster reaction time being achieved along with yields of >80% and purity of 98%. Key outstanding risk now is scaling up with commercial production set to commence in Dec 2023.

c) FY23 industrial chemical performance was weak, likely to continue into FY24 due to the tough operating landscape amidst slowing global demand and easing oil prices.

d) After increasing its effective interest in Ancom Nylex Terminals, which owns 48 tanks (44,100 m3) in Westport, from 17% to 66% for RM8m in Oct 2022, the group’s logistics-cum-chemical tank farm outlook is looking more positive.

Overall, the net profit guidance for FY24 is about RM100m but we are comfortable with our slightly higher estimate of RM110.6m on more stable agri-chemical ASP, bottoming of industrial chemicals inventory drawdown and more customers opting a China+1 supply strategy.

We are reiterating our FY24-25F CEPS 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). Likewise, we are maintaining our OUTPERFORM call.

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 - 18 Jul 2023