We maintain our BUY call on Ancom Nylex (Ancom) with a higher fair value (FV) of RM1.43/share. This is pegged to a target FY24F PE of 14x, 0.75 standard deviation (SD) (from 1 SD previously) below its 5-year mean of 21x. We apply a lower SD due to more stable commodity markets recently. No ESGrelated FV adjustments based on an unchanged 3-star rating.
Our earnings forecasts are maintained following the imminent commercialisation of 2 monosodium methanearsonate (MSMA)-related reactors and the arrival of 9 reactors to manufacture a new active agricultural chemical ingredient (AI) named Product T. We deem these developments as within our expectations.
Based on our checks with Ancom, 9 new reactors (Exhibit 1) to be used to produce a new AI with a total capacity of 1k MT/annum have arrived last week. The new AI is tentatively known as Product T. We expect these reactors will be commercialised in 2HFY24F.
To recap, the major earnings driver for the group in FY24F- 25F lies in moving towards higher average selling price (ASP) market niches in the agricultural chemical (agrichem) landscape by commercialising Product T and S (Exhibit 2). Product T is now selling at US$18-20/litre and Product S at US$40-45/litre as compared to existing products which carry ASPs in the low-to-mid single-digit US$/unit.
This higher ASP playing field allows Ancom to enjoy higher profit/unit given the lower competition. We estimate that Product T will contribute revenue of RM80mil-RM85mil in FY24F, translating to a 3.7-3.9% YoY revenue growth that has already been incorporated in our assumptions.
Separately, an additional 2 new reactors for the manufacturing of existing AI named MSMA arrived in Dec 2022. After the installation of these reactors, the total count of MSMA-related reactors will increase from 7 previously to 9 (+29%), excluding the units for other products. According to Ancom, the 2 additional reactors will be commercialised by Feb 2023.
To recap, the rationale behind the expansion of MSMA-related capacity is to tap on rising demand driven by the ban on paraquat, especially in Thailand since 2020, given its negative health and environmental impact.
According to news report from The Strait Times, following the ban on paraquat, Thailand will experience a significant agronomic impact leading to a 3x increase in production cost and 20–30% dip in overall agricultural produce. The replacement market for paraquat in Thailand is estimated to be worth USD60–80mil a year.
Ancom has identified 2 of Ancom’s MSMA-based formulations, Dasaflo and Monex HC, as close substitutes for paraquat (Exhibit 3). Hence, demand for MSMA-based products, which is one of the closest paraquat replacement available in the market, has increased significantly since FY22.
In the near term, we believe Ancom will continue to benefit from the ban on paraquat, especially in Thailand and Malaysia. Over the medium-to-longer term, the introduction of new AIs will further underpin the upward trajectory of the group’s FY23F-25F earnings.
The stock currently trades at a compelling FY24F PE of 12.4x, implying an 11% discount to 14x, which is 0.75 SD below its 5-year mean of 21x.
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