Investment Highlights

• We maintain BUY on Ancom Nylex (Ancom) with a higher fair value (FV) of RM1.28/share (from RM1.26/share previously) based on a rolled-forward FY25F PE of 14x , 1 SD above 2-year average (from Jun 2022). No ESG-related FV adjustment based on an unchanged 3-star rating, which could be raised upon the completion of 34%-owned Ancom Logistics’ (ALB) acquisition of Green Lagoon Technology (GLT).

• We reduced our FY25F-26F earnings by 8%/6% following a result briefing yesterday, to mainly account for the later-than- expected launching of Products T and S.

• The commercialisation of Product T, with an initial capacity of 1K MT/annum (which can be scaled up to a max 3K MT/annum), is delayed to end-2024 (2HFY25F), later than our recently revised assumption of mid-2024 (1QFY25F). This postponement is primarily attributed to unresolved logistics and HS code-related issues from China’s regulators.

• Hence, Ancom decided to bring in the phosgenation process to generate intermediates for Product T, rather than procuring from China. For now, the process is being simulated in a small-scale with the arrival of all equipment anticipated by Jul 2024. Assuming 2 months of learning curve for the phosgenation process, Product T should be commercialised in Dec 2024.

• For Product S with an initial capacity of 500 MT/annum (which can be scaled up to a max 1.5K MT/annum), we believe the commercialisation will be delayed from 4Q2024 (2QFY25F) to mid-2025 (FY26F) due to the delayed launch of Product T.

• For timber preservatives, Ancom will expand capacity by 40%-50% by 1QFY25F in response to strong demand from US-based customers, whose orders increased from 3-4K MT/annum in FY23 to 8-10K MT/annum in FY24F as a result of trade diversions from China. Ancom is confident the additional capacity will be taken up by the US-based customers upon completion.

• On 22 Apr, Ancom, together with its 34%-owned ALB, entered into Heads of Agreement (HoA) with the vendors, Greenheart, Chong Wee Keong and How Yoon For, for the following proposals, which are inter-conditional:
  (a) ALB’s proposed acquisition of the entire share capital of GLT for a total consideration of RM120mil, subject to an independent valuation during due diligence. In exchange, ALB will issue 1bil units of new ordinary shares at an issue price of RM0.12/share to GLT’s shareholders.
  (b) Proposed RM22mil private placement of up to 183mil units of ALB’s new ordinary shares at an issue price of RM0.12/share to Ancom.
  (c) Proposed disposal of all subsidiaries operating under ALB to Ancom at a valuation to be determined later.
  (d) Profit guarantees to ALB from vendors that GLT will generate a minimum PAT of RM8mil in 1st year and RM10mil in 2nd year from the date of completion of the proposed acquisition. Notably, GLT generated a net profit of RM4mil in CY22. The earnings in coming years will be boosted by upcoming commissioning of new assets and revenue recognition from existing and future EPCC projects.

• GLT is a Malaysia-based environmental solutions company established in 2010, specialising in the design, construction, operation and management of biogas plants for various industries, with a particular emphasis on palm oil sector. By 2022, GLT has been involved in over 60 projects in Malaysia and Indonesia. For now, GLT owns over 25MW of power assets, which represents one of the top biogas developers in Malaysia. The revenue breakdown for GLT is shown in Exhibit 2.

• The rationale for Ancom agreeing to the deal are: (a) Ancom can advance its ESG-roadmap by almost completely de-carbonising within a year of the acquisition, (b) owning a profit-generating associate is better than an operation currently just barely breaking even, (c) capitalising on the synergies between GLT and Ancom, which has a large network of oil palm planters.

• We regard the 1-year forward acquisition PE of 12x as a bargain compared to Solarvest Holdings’ 1-year forward PE of 23x and Samaiden Group’s 20x.

• Nevertheless, upon completion of the proposal, Ancom’s effective stakes in ALB will be diluted to 21% from current 34%. Assuming the proposals to be completed within 12 months by late-FY25F, the guaranteed profit of RM8il in the 1st year will only account for a negligible 1% of Ancom’s FY26F earnings.

• Even so, Ancom reaffirmed a prospective FY24F cash dividend guidance following these proposed transactions.

• In FY25F, we expect agrichemicals segment to benefit from:
  (a) trade diversions (especially timber preservatives) by multinational corporations from China to Ancom, and
  (b) shift in demand from expensive patented herbicides to cheaper generic versions amid an expected global economic slowdown, and
  (c) commercialisation of Product T in 2HFY25F.

• Despite the stock currently trading at FY25F PE of 12x, near its 2-year average, Ancom is still a bargain as it is the largest agrichemical manufacturer in ASEAN. Notably, we changed to a 2-year timeframe instead of a previous 5- year period mainly due to the more relevant earnings growth trajectory in FY22-24F (CAGR of 20%), compared to an exceptional CAGR of 2.4x in FY20F-22F from a low base during the pandemic. In FY24F-26F, we forecast a more moderate CAGR of 24%.

Source: AmInvest Research - 24 Apr 2024