ANCOMNY is guiding towards a more "normal" profit from 2HFY25 onwards after a disappointing 1HFY25. Hampered by unusual items - from high freight cost to negative currency impact and higher tax rates - 1HFY25 profits were dragged down by an estimated RM20m in unusual items which is likely to abate or not recur. FY26 should thus see strong YoY recovery from not only weak comparatives but more importantly from a slew of old as well as new profit drivers.

We maintain our forecasts, TP of RM1.20 and OUTPERFORM rating.

ANCOMNY's results briefing provided a better idea of the unusual "one offs" in 1HFY25 result and how they should abate in 2HFY25.

Nonetheless, FY25 looks to be a year of consolidation but FY26 should see strong recovery on the back of the following:

1. Strong timber preservative sales to stay despite having risen 30%- 40% since FY24, thanks to a 3-year contract signed in June CY24. However, the "one-offs" is freight cost which rose by RM13m which squeezed 1HFY25 margins. Nevertheless, ANCOMNY's timber preservative SKU remains profitable and freight charges to most destinations have started easing except for US ports such as Savannah and Memphis.
2. Firmer MSMA orders dampened by strong USD. A core earner for the group, MSMA is exported widely including to US, Brazil and Thailand where orders have probably inched up 2%-3% YoY but the sudden MYR strengthening in 2Q dampened USD-denominated export revenue when translated back into MYR. Meanwhile, 2Q production was still using raw materials bought when the MYR was weaker, hence 2Q forex swing had probably set ANCOMNY back by RM3m-RM5m but this should even out in 2HFY25.
3. MSMA Brazilian sales may balloon over the coming 2-3 years. ANCOMY already sells MSMA to sugarcane planters in Brazil. It is now applying to sell MSMA to the soyabean sector which is 5x larger in planting area than sugarcane. Two out of the three necessary approvals have been obtained in the past two years. ANCOMNY hopes the final consent can be granted for some sales in 2HFY26 with expected potential uplift of 5%-10% towards FY26 CNP.
4. New AIs. More meaningful sales of AI "T" is now set to commence in FY26 as ANCOMNY finetunes a new phosgenation process added to ease raw material access. A yet to be launch AI called "S" may also debut in late FY26/early FY27 while Bromacil and Ester, launched two years ago, are growing within their respective niches.
5. Streamlining of industrial chemicals, which has been ongoing is set to continue. Headcounts have been trimmed in the past year and its southern peninsular storage facility is being relocated from Singapore to Johor with annual savings of RM5m likely from FY26 onwards.
6. Reverse takeover (RTO) of Green Lagoon Technology (GLT). 34%- owned Ancom Logistics Bhd (ALB, Non-Rated) is in the midst of an RTO to acquire Green Lagoon Technology Sdn Bhd (GLT) which operates its own biogas-to-electric concessions (26MW YTD) as well as designs, constructs and/or operates third party biogas projects including those of IOI, SD Guthrie and Farm Fresh. ANCOMNY's eventual aim is to still own 21% of GLT so as to enjoy contribution from decarbonisation and sustainability projects as RM8-10m of annual PAT guarantee is being provided by GLT post the RTO.

Valuations. We also keep our TP of RM1.20 based on 13x FY26F PER, which is at only half the forward PER of much larger regional agriculture chemical peers. 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: (i) its position as the largest herbicide active ingredients producer in South-East Asia, (ii) benefiting from the widening ban on Paraquat use, (iii) it is likely to gain from the 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 crop production in key markets, (ii) regulatory risk on AI, and (iii) foreign exchange translation risk.

Source: Kenanga Research - 20 Jan 2025