ANCOMNY’s 1QFY24 results met market expectations but fell short of our forecast. Its 1QFY24 net profit grew 11% YoY driven by stronger agri-chemicals and polymer margins, which more than offset weaker industrial chemical and logistical performance. We cut our FY24-25F net profit forecasts by 8-3%, lower our TP by 17% to RM1.50 (from RM1.80) but maintain our OUTPERFORM call.

Its 1QFY24 core net profit of RM21.1m (+83% QoQ, +11% YoY) fell short of our expectation at only 19% of our full-year forecast but met market expectations at 21% of the full-year consensus estimate. The variance against our forecast came largely from: (i) softer industrialchemical sales and margins, and (ii) lower revenue from its logistics business although its margins held better. These were partially cushioned by a strong showing from agri-chemicals on greater proportion of higher margin timber preservative revenue.

The competition in the agri-chemicals space was still stiff, though had somewhat stabilised. Its finance cost was higher than expected on rising cost of borrowing even as net gearing eased QoQ, from 49% in 4QFY23 to 41% as at end 1QFY24. Altogether, the first quarter performance was good despite the lower revenue which was mitigated by higher margins.

While we cut our FY24-25F net profit forecasts by 8-3%, the earnings growth is still strong at 32% in FY24 and 29% in FY25 underpinned by:

1. Robust demand for MSMA (monosodium methanearsonate) which replaces Paraquat. Thai demand moderated on drier weather, but heavier rain in Brazilian sugarcane plantations prompted more demand – wet weather encourages weed, which spurs the need for MSMA. As the only other MSMA producer is in Israel, ANCOMNY may also secure additional orders or/and see firmer ASP moving forward due to the current Middle-East tension.
    
2. Good timber preservative demand from US and the product attracts better margin than traditional agri-chemical products as ANCOMNY enjoys a near dominance in this product segment.
    
3. Broader and larger agri-chemical portfolio. Bromacil and Ester, which were introduced to target pineapple and cereal crops in FY22 is growing though still small. New capacity in the pipeline for the launch of two to three more new products over FY24-26 including active ingredient “T”.
    
4. Acquiring adjacent expertise or assets such as HJ Unkel Chemicals to strengthen procurement as well or the acquisition of animal-health related asset (Shennong) in Dec 2021.

Correspondingly, we lower our TP by 17% to RM1.50 (from RM1.80) based on 15x FY24F PER, at a 30% discount to the average forward PER of regional agriculture chemical peers of 22x to reflect its smaller market capitalisation. There is no change to our TP arising from its 3- star ESG rating which is appraised by us (see page 4).

We continue to like ANCOMNY for: (i) its position as the largest herbicide active ingredients producer in South-East Asia, (ii) it being a beneficiary of the widening ban on Paraquat use, and (iii) it being 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 - 18 Oct 2023