Investment Highlights

• We maintain BUY call on Ancom Nylex (Ancom) with an unchanged fair value (FV) of RM1.44/share based on a CY24F target P/E of 14x (Exhibit 1), 0.75 standard deviation (SD) below its 5-year mean of 21x. No ESG-related FV adjustment based on an unchanged 3-star rating.

• We maintain our FY24F-26F earnings following a result briefing yesterday.

• Ancom guided that a prospective cash dividend is still possible in FY24F following the 1-for-100 dividend-in-specie announcement yesterday. Hence, we maintain our DPS assumption of 1.5 sen for FY24F, 2.0 sen for FY25F and 2.5 sen for FY26F. Nevertheless, Ancom highlighted that capexdriven expansionary activities will be prioritised if any emerge.

• Product T, with an initial capacity of 1K MT/annum (which can be scaled up to a max 3K MT/annum), should be commercialised by Mar/Apr 2024 (or 4QFY24F), which is later than the initial target of Dec 2023 or Jan 2024.

• The delay was mainly in allocation of HS codes for Product T intermediates by both Chinese and Malaysian customs offices since these intermediates have never been exported/imported from/to these countries. Nevertheless, this issue has now been resolved and the intermediates will be delivered by end-Jan 2024.

• For Product S, with an initial capacity of 500 MT/annum (which can be scaled up to a max 1.5K MT/annum), the group guided that that equipment installation is now scheduled to be completed by 3Q2024 instead of 1H2024 due to the launch delay of Product T. Hence, we believe the commercialisation will begin in 4Q2024 (or 2QFY25F) instead of early 2H2024.

• We estimate that FY24F-FY25F earnings shortfall caused by these delays could be -2%. Nevertheless, this could be fully offset by prospective new orders for MSMA-related products in March 2024, due to trade diversions from the sole MSMA competitor in Israel amid the ongoing Gaza-Israel conflict, which started since 7 Oct 2023.

• Separately, the recent attacks in the Red Sea have caused a significant disruption to global logistics, leading to a surge in sea freight rates. For example, the rates from Malaysia to Brazil rose 2-3x per 20-foot container. On a positive note, Ancom can pass on most of the higher logistics cost to customers.

• All in, we expect Ancom to register a stronger 2HFY24F revenue and profit compared to 1HFY24, supported by potential MSMA-related trade diversions and commercialisation of Product T.

• In FY24F, we expect agrichemicals segment to benefit from:
  
  (a) trade diversions by multinational corporations from China to Ancom,
  
  (b) shift in demand from expensive patented herbicides to cheaper generic versions amid an expected global economic slowdown,
  
  (c) commercialisation of Product T in 2HFY24F, and
  
  (d) potential MSMA-related trade diversions from Israel in 2HFY24F.
   
• The stock currently trades at an unjustified CY24F PE of 11x, almost half of its 5-year mean of 21x, for the largest agrichemical manufacturer in ASEAN.

Source: AmInvest Research - 19 Jan 2024