ANCOMNY’s 2HFY24 performance will continue to be weighed down by weak industrial chemical margins, though partially cushioned by strong agri-chemical off-takes underpinned by its existing offerings and there is room for sales to improve for its newer products. We cut our FY24F net profit forecast by 11% but maintain our TP of RM1.50 and OUTPERFORM call.

We came away from a recent engagement with ANCOMNY feeling a tad cautious on its near-term outlook but remaining positive on its long-term prospects. The key takeaways are as follows:

1. A less toxic alternative to Paraquat, MSMA Latin and North American sales are helping to offset softer Thai demand where current dry weather has reduced farmers’ need to apply MSMA. More importantly, Brailizian usage of MSMA extending beyond sugarcane to include soyabean is progressing well with possible contribution from FY25 onwards. Indonesia has also approved an MSMA-variant but it is a new MSMA market and Paraquat is still allowed in Indonesia, so meaningful contributions will take time to emerge.

2. Robust timber preservative offtake. Talks with a longstanding US buyer for a sizeable supply contract are now in advanced stages. The agreement is for (i) a 3-year period, with (ii) quarterly price reviews and will comprise half the group’s future timber preservative sales. Meanwhile, pending the contract signing, orders are constantly being refreshed.

3. Newer agri-chemicals Bromacil and Ester sales are slower than expected. Targeted at the pineapple and cereal markets, demand is decent but overall contribution is small. Recent selling prices are also under some pressures, hence ANCOMNY is emphasising more on other new active ingredients until Bromacil and Ester markets become more active.

4. Latest agri-chemical addition, active ingredient no. 7 or AI “T”, should start selling soon after a half-year delay. However, to improve stability and consistency, ANCOMNY is adding another manufacturing step into the process. Stable-state commercialisation may thus be delayed by 6-12 months as additional equipment should be installed in June followed by fine- tuning. Till then, inputs will be purchased as originally planned.

5. Industrial chemical cost base undergoing reviews. As earnings are largely derived from trading, margins are thinner. To improve margins, ANCOMNY is gradually relocating its southern peninsular storage facility in Singapore to Johor where leases can be 50-60% lower. The first phase of this 2-3 years relocation undertaking will commence in 2QFY25.

Forecasts. We cut our FY24F net profit forecast by 11% on weaker- than-expected industrial chemical margins.

Valuations. However, we maintain our TP of RM1.50 which is based on 13x FY25F PER, at about half the forward PER of larger regional agriculture chemical peers. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 4).

Investment case. We continue to like ANCOMNY for: (i) its position as the largest herbicide active ingredients producer in South-East Asia, (ii) a beneficiary of the widening ban on Paraquat use, (iii) a beneficiary of US-China trade tension as well as (iv) being a proxy to global food production and food security goal. Maintain OUTPERFORM.

Risks to our call include: (i) downturn in key crop markets, (ii) regulatory risk, and (iii) foreign exchange translation risk.

Source: Kenanga Research - 4 Apr 2024