ANCOMNY reiterated its guidance for a 30%-40% YoY growth in its FY24F net profit. It expects robust agri-chemical profits driven by stronger timber preservatives orders, new product launch and the bottoming out of the industrial chemical division. We maintain our forecasts, TP of RM1.50 and OUTPERFORM call.

We came away from ANCOMNY’s 1QFY24 results briefing feeling positive. The key highlights are as follows:

1. Agri-chemical margin should stay healthy even though the general pricing environment remains weak. However, the softness is not due to aggressive Chinese selling (an issue earlier) but more from weak input prices; hence, margins should not be badly affected. Moreover, stronger US order for timber preservatives - which enjoy superior margin to normal agri-chemicals – should translate to more robust overall agri-chemical margins and profits moving forward.

2. Fortuitous MSMA (monosodium methanearsonate) expansion timing. ANCOMNY guided that if its Israel-based MSMA rival is severely affected by the Middle East tension, the intention is to sell more volume rather than raising prices as it is adding 4m-5m litres of new capacity by mid-CY24 (i.e. 1HFY25). The expansion is intended to address potential MSMA sales to Brazilian soyabean farmers. So far, ANCOMNY has only sold MSMA to sugarcane planters there even though Brazil’s soya bean planted area is 4x-5x larger than sugarcane’s. As its rival also sells to Latin America, ANCOMNY is being strategic in trying to gain as much market share in Brazil as possible rather than just implementing a pricing advantage which can be easily reversed depending on circumstances. Its current annual MSMA capacity of 11m litres is already 80% taken.

3. New active ingredient (AI) “T” plant is finally completed. After a delay of about three months, trial runs for the new plant will begin soon with commercial production scheduled to start at the end of CY23 or early CY24 (2HFY24). Thereafter, the design and fit-out for another new AI (“S”) plant will begin with tentative production to start in 2HFY25. The premise for AI “S” processing facility is next to the AI “T” plant and is already built.

4. Industrial chemical performance to stay dull. The division’s 1QFY24 performance was pulled down by methanol trading losses. However, even without the loss, ANCOMNY expects this segment’s contribution to stay subdued over FY24, possibly even into FY25.

5. Cash utilisation. Its net gearing fell last year prompting ANCOMNY to declare a 1.0 sen dividend in 4QFY23, the first in nine years. However, the priority is still to direct cash to (i) grow the group first followed by (ii) paying down loans as RM50m-RM60m of its current debt attract no tax advantages and only then would (iii) dividends be considered. On share buyback, the group is possibly collecting shares to resell as blocks to strategic or longer-term investors.

Forecasts. Maintained.

We also maintain our TP of RM1.50 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 on AI, and (iii) foreign exchange translation risk.

Source: Kenanga Research - 19 Oct 2023