ANCOMNY's 1HFY25 results came in 21% and 23% below Kenanga and consensus estimates, respectively. YoY, 1HFY25 agri-chemical margins were affected by currency volatility and high freight cost while industrial chemical saw weaker trade and margins. We are cutting FY25-26F core net profit (CNP) by 21-17% on the slower sales growth, higher costs as well as taxes. Our TP is trimmed from RM1.40 to RM1.20 but we are keeping our OUTPERFORM call on expected strong agri-chemical recovery ahead and opportunities from new strategic partner, Helm AG (Helm).

1HFY25. Excluding disposal and exchange gain of RM1.9m altogether, CNP of RM27.2m (-37%) in 1HFY25 came in at only 32% and 31% of Kenanga and consensus full-year estimates, respectively. The main variance against our forecast was due to still elevated freight cost despite QoQ improvement, weaker industrial performance and higher effective tax charges. As expected, no interim DPS was declared.

2QFY25 revenue eased to RM450.7m (-13% QoQ, -11% YoY) on weaker industrial chemical volume as well as ASP. Agri-chemical sales was flat QoQ but managed to still inch up YoY on good orders for timber preservative and MSMA. However, CNP fell 40% YoY and slipped 3% QoQ due to mainly to higher freight cost.

Mixed outlook. Although agri-chemicals demand remains healthy, FY25 CNP margins will likely struggle with elevated cost and soft industrial chemical demand. FY25 should also end with 15% dilution to EPS, no thanks to 96.2m new shares issued to Helm in Sept CY24 with 60m warrants converted since the start of FY25 (i.e. June CY24).

Business wise, agri-chemicals prospect looks promising thanks to the following factors below:

1. The MSMA market in Latin American can be potentially larger over the next 3-5 years, especially in Brazil. So far ANCOMNY only sells MSMA to sugarcane farmers in Brazil but is now in final stages of getting regulatory go ahead to apply MSMA in soyabean fields as well; soyabean covers about 45m Ha in Brazil or 5x larger than its sugarcane area. Indonesia is another new market but being a market totally new to MSMA, time will be needed to expand the market there. Thai demand is making a comeback after a soft season. Overall, MSMA's prospects are looking good.
2. Timber preservative orders are robust thanks to a 3-year supply contract. Unfortunately, 1H margins have been squeezed by high freight cost to the US. Nonetheless, cost of freight has been on the decline since 1Q and should normalise later in FY26.
3. New AIs. After long delays, ANCOMNY appears more confident of a full commercialisation of AI "T" come mid-CY25, i.e. earIy-FY26.

Part of the delay is due to the introduction of a new processing step to ease access and imports of a key input. Meanwhile, launched in FY22, Bromacil and Ester sales are growing but still small.

After facing headwinds in 1HFY25, the industrial chemical unit should see better days ahead. While the margins were still tight, the relocation of tank storage from Singapore to Johor should lower cost from 2HFY25 onwards. Helm was built on trading and distributing industrial chemicals in Europe and America thus its emergence as a substantial shareholder may lead to opening for the industrial chemical unit as Helm is keen to expand further in Asia.

Meanwhile, 34%-owned Ancom Logistics Bhd (ALB, Non-Rated) has proposed to buy Green Lagoon Technology Sdn Bhd (GLT) for RM120m by issuing 1.0b new shares at RM0.12 per share. As this will dilute ANCOMNY's existing stake to 10%, ANCOMNY will subscribe 183m new ALB shares for RM22m cash or RM0.12 per share to raise its stake in ALB back to a 21% associate. Founded in 2010, GLT designs, constructs, operates and/or manages over 60 biogas projects for the likes of IOI, FELDA, and Farm Fresh in Malaysia and Indonesia.

Forecasts. FY25-26F CNP are cut by 21% and 17%, respectively.

Valuations. TP for ANCOMNY is also cut by 14% from RM1.40 to RM1.20 which is still based on 13x FY26F PER or half the forward PER (25x) 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 - 17 Jan 2025