ANCOMNY’s 1HFY24 results disappointed us but met market expectation. Its 1HFY24 core net profit grew 3% YoY as stronger agriculture and industrial chemical profits were offset by higher non-core losses and weak logistics earnings. We cut our FY24-25F net profit forecasts by 6% and 13% respectively but maintain our TP of RM1.50 and OUTPERFORM call.

Its 1HFY24 core net profit of RM43m missed our expectation at only 43% of our full-year forecast but met market expectation at 46% of the full-year consensus estimate. The variance against our forecast came mainly from: (i) a softer logistics contribution, and (ii) higher corporate expenses. Its agri-chemicals earnings were lifted by strong orders for higher-margin timber preservative (which should remain for the rest of FY24). ANCOMNY declared a dividend in specie of 1 share for every 100 held which should reduce its 46m treasury shares to 36m shares.

The agri-chemical market remains soft as easing agri-commodity prices tend to make farmers/producers more sensitive to input prices such as agri-chemicals. However, ANCOMNY’s focus on less competitive niches provides some reprieve to margins.

We expect its margins to stay firm underpinned mainly by:

1. Positive outlook for MSMA (monosodium methanearsonate), an alternative herbicide to the more toxic Paraquat which is facing widening bans. While El Nino brings dryness to SE Asia which reduces requirements for weed-killers, it brings wet weather to Latin America thus stimulating robust MSMA orders from Brazil. Moving forward, ANCOMNY is seeking regulatory approvals to broaden its Brazilian MSMA sales beyond sugarcane to soyabean.

2. Timber preservative orders staying healthy as ANCOMNY enjoys a strong market position for this product range. Ongoing negotiations with an old US buyer for a longer term (2-3 years) contract could also be finalisating. More importantly, margins for this range are typically superior to other traditional agri-chemical lines.

3. Larger agri-chemical portfolio. Bromacil and Ester, launched in FY22, to target the pineapple and cereal markets are still small but growing well. 2-3 more new products are slated for launching over FY24-26. Among the new products is Tebuthiuron which has been delayed for six months now but a key input chemical has finally been cleared by customs, hence commercial scale production should commence in Feb/March 2024.

Forecasts. We cut our FY24-25F net profit forecasts by 6% and 13%, respectively to reflect further delays in the launch and the scaling up of Tebuthiuron by about six months.

Valuations. We maintain our TP of RM1.50 as we roll forward our valuation base year to FY25F (from FY24F). We now value ANCOMNY at 13x FY25F PER (vs. 15x FY24F PER previously), at only about half of the forward PER of its regional agriculture chemical peers given ANCOMNY’s much smaller size. There is no change to our TP arising from its 3-star ESG rating which is appraised by us.

Investment Case. We continue to like ANCOMNY for it being: (i) largest active ingredients producer for herbicide in SouthEast Asia, (ii) a beneficiary of widening ban of the highly toxic Paraquat, and (iii) an alternative, neutral supplier amidst USChina trade tension. It is indirectly a proxy to global food production and food security as well. 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 Jan 2024