Kenanga Research cuts net profit forecasts for Ancom Nylex Bhd to reflect further delays in the launch and the scaling up of its new product, the non-selective broad spectrum herbicide Tebuthiuron by about six months.
In its Results Note today (Jan 18), the research house said it cuts its FY24 and FY25F net profit forecasts by 6% and 13% respectively, for the abovementioned reasons.
It also maintained its OUTPERFORM call and TP of RM1.50 as it roll forward its valuation base year to FY25F from FY24F.
“We now value Ancom Nylex at 13x FY25F price-earning ratio (PER) compared to 15x FY24F PER previously, at only about half of the forward PER of its regional agriculture chemical peers given the group’s much smaller size.
“There is no change to our TP arising from its 3-star ESG rating which is appraised by us,” it added.
On its 1HFY24 results, Kenanga announced that Ancom Nylex disappointed its expectation but met market consensus.
“Its 1HFY24 core net profit grew 3% year-on-year (YoY) as stronger agriculture and industrial chemical profits were offset by higher
non-core losses and weak logistics earnings.
“The variance against our forecast came mainly from a softer logistics contribution and higher corporate expenses. Its agrichemicals earnings were lifted by strong orders for higher-margin timber preservative, which should remain for the rest of FY24.”
Ancom Nylex declared a dividend in specie of 1 share for every 100 held which should reduce its 46 million treasury shares to 36 million.
The research house said the agrichemical market remains soft as easing agri-commodity prices tend to make farmers and producers more sensitive to input prices such as agrichemicals.
“However, Ancom Nylex focus on less competitive niches and provides some reprieve to margins. We expect its margins to stay firm underpinned mainly by (a few factors).
“(Firstly), by the positive outlook for MSMA (monosodium methanearsonate), an alternative herbicide to the more toxic Paraquat which is facing widening bans.
“While El Nino brings dryness to SE Asia which reduces requirements for weed-killers, it brings wet weather to Latin America thus stimulating robust MSMA orders from Brazil.
“Moving forward, Ancom Nylex is seeking regulatory approvals to broaden its Brazilian MSMA sales beyond sugarcane to soyabean.”
Another reason for the firm margin is the healthy timber preservative order as Ancom Nylex enjoys a strong market position for this product range.
“Ongoing negotiations with an old US buyer for a longer term, for around 2 to 3 years. The contract could also be finalising. More importantly, margins for this range are typically superior to other traditional agrichemical lines,” it said.
Kenanga said that the last factor is the group has larger agrichemical portfolio, such as Bromacil and Ester.
“Two or 3 more new products are slated for launching over FY24 to FY26. Among the new products is Tebuthiuron which has been delayed for six months now.
“However, the key input chemical has finally been cleared by customs, hence commercial scale production should commence in February or March 2024,” it said.
It added: “We continue to like the group for it being the largest active ingredients producer for herbicide in Southeast Asia, a beneficiary of widening ban of the highly toxic Paraquat, and an alternative, neutral supplier amidst US-China trade tension. It is indirectly a proxy to global food production and food security as well.”
The risks to Kenanga’s call include downturn in crop production in key markets, regulatory risk, and foreign exchange translation risk.
