ANCOMNY’s 9MFY24 results met our forecast but disappointed the market. Its 9MFY24 core net profit grew 5% despite a generally soft agri-chemical market thanks to strong timber preservative orders, inroads to new markets for its active ingredients (AIs), and high- margin new AIs. We maintain our forecasts, TP of RM1.50 and OUTPERFORM call.

Its 9MFY24 core net profit of RM62m met our expectation at 74% of our full-year forecast but disappointed the market at only 70% of the full-year consensus estimate.

YoY, its 9MFY24 core net profit grew 5% despite a generally soft agri- chemical market thanks to: (i) higher-margin timber preservative orders, (ii) wider applications and new markets of older AIs, and (iii) higher margins from newer AIs. These were partially offset by: (i) tighter industrial chemical margins and (ii) higher taxes.

QoQ, its 3QFY24 core net profit declined 15% largely due to higher taxes.

Its FY24-25F earnings are expected to be healthy on the back of the following:

1. A less toxic alternative to Paraquat, MSMA sales in Latin American is helping to offset softer Thai demand, as drier weather tends to reduce MSMA usage. More importantly, an ANCOMNY variant of MSMA has finally been approved for use in Indonesia, while Brazil should extend MSMA applications beyond sugarcane to include soyabean within the next 12 months.

2. Timber preservative orders are still robust as ANCOMNY commands a strong market position for this product range. Talks with a longstanding US buyer for a 2-3 years contract are ongoing but, regardless, it is still giving advance orders to ANCOMNY. Importantly, margins for this range are usually superior to other traditional agri-chemical lines.

3. Demand for new agri-chemicals, Bromacil and Ester, launched in FY22, to target the pineapple and cereal markets is still small but growing well, but margins are good. ANCOMNY is targeting to launch to 2-3 more new products over FY24-26. Among the new products is AI “:T” that 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.

Separately, its 34%-owned Ancom Logistics Bhd (ALB, Non-Rated) is acquiring Green Lagoon Technology Sdn Bhd (GLT) for RM120m to be satisfied by the issuance of 1b new shares at RM0.12 per share. As this will dilute ANCOMNY’s existing stake to 10%, ANCOMNY will subscribe to 183m new ALB shares for RM22m cash or RM0.12 per share to bring its interest in ALB back to an associate stake of 21%. GLT designs, constructs, operates and manages biogas plants across Malaysia and Indonesia. Since its inception in 2010, GLT has been involved in over 60 biogas projects including those belonging to Sime Darby Plantation, IOI Corporation and Farm Fresh. Following the proposed acquisition, annual profit after tax guarantees of RM8m and RM10m for the first and second year will be in place respectively. We expect the proposal to conclude in 1HFY25.

Forecasts & valuations. We are keeping our FY24-25F net profit forecasts intact along with our TP of RM1.50 based on 13x FY25F PER or about half the forward PER of 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 (see page 4).

Investment case. We continue to like ANCOMNY for it being: (i) largest active ingredients producer for herbicide in South- East Asia, (ii) a beneficiary of widening ban of the highly toxic Paraquat, and (iii) an alternative, neutral supplier amidst US- China 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 - 23 Apr 2024