ANCOMNY’s guidance for FY24-25F earnings corresponds broadly with our expectation, with earnings growth driven mainly by robust ongoing timber preservative orders, good monosodium methanearsonate (MSMA) prospects and the launch of new active ingredients (AIs) such as Tebuthiuron. We maintain our forecasts, TP of RM1.50 and OUTPERFORM call.

ANCOMNY remains positive of its FY24-25F growth prospects despite challenges such as a 6-month delay in the commercial launch of its new product Tebuthiuron, the tripling in shipping freight rates amidst heightened tensions in the Red Sea and the still soft agri-chemical market. ANCOMNY is pinning its hopes on:

1. Favourable timber preservative orders looking set to continue into FY25. Although ANCOMNY has yet to secure the 3-year contract with an existing US customer, the customer has – without fail – consistently been replenishing its monthly orders in advance. In any case, ANCOMNY expects the 3-year contract to be finalised soon (< 6 months). Margins for timber preservative are good, hence healthy order is set to help to lift overall FY24-25F profit margins.

2. Positive MSMA outlook. One of ANCOMNY main MSMA competitors is from Israel. While the Red Sea tension has not impacted their operations, concerns of further escalations may lead to some customers buying from ANCOMNY. ANCOMNY has also completed capacity expansion (from 11m to 15m litres a year) earlier than we expected; hence, it will be ready to meet any such orders. Most of the new capacity is meant for: (a) Brazil where ANCOMNY plans to extend sales beyond sugarcane to cover soyabean hectarage where the crop area is 4x-5x larger that of sugarcane, (b) first time exports to Indonesia, and (c) recovery in Thailand after a dull year or two.

3. Tebuthiuron production will start soon after a six-month delay. Tebuthiuron commercial run is now pending commencement after delays of about six months. The first batch (4 MT) of a key input chemical is now on the way from China after export code and customs clearance were given. An initial run looks likely in Feb or March but will still require another 3-6 months for proper scale up. Meanwhile, the fit-out at another plant (factory “C”) to produce a new product (AI no. 8 or AI “S”) should be completed by end of CY24 (2Q/3Q FY25).

Forecasts. Maintained.

Valuations. We also maintain our TP of RM1.50 based on 13x FY25F PER, which is at only about 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.

Investment case. We continue to like ANCOMNY for: (i) its position as the largest herbicide active ingredients producer in South-East Asia, (ii) a beneficiary of the widening ban on Paraquat use, (iii) a beneficiary of 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 - 19 Jan 2024