Ancom Nylex long-term growth prospects intact

PETALING JAYA: Kenanga Research expects Ancom Nylex Bhd’s performance will continue to be weighed down by weak margins for industrial chemicals in the second half of its financial year 2024 (2H24).

This is despite being partially cushioned by strong agrichemical demand underpinned by its existing offerings and also room for sales to improve for its newer products, the research house noted.

Following a recent meeting with Ancom, Kenanga Research said, “We came away feeling a tad cautious on the group’s nearterm outlook, but remain positive on its long-term prospects.”

Some of the key takeaways from the meeting include the company’s industrial-chemical cost base undergoing review.

“As earnings are largely derived from trading, margins are thinner. To improve margins, Ancom is gradually relocating its storage facility in Singapore to Johor, where leases can be 50%-60% lower.

“The first phase of this two to three-year relocation will commence in 2Q25,” Kenanga Research said in a report yesterday.

Ancom also highlighted that sales of newer agrichemicals – Bromacil and Ester – have been slower than expected.

“Targeted at the pineapple and cereal markets, demand is decent but their overall contribution is small.

“Recent selling prices are also under some pressure, hence Ancom is emphasising other new active ingredients until the Bromacil and Ester markets become more active,” the research house said.

Another positive development is the robust demand for timber preservative and talks with a longstanding US buyer for a sizeable supply contract are now in advanced stages.

The agreement is for a three-year period, with quarterly price reviews and will comprise half the group’s future timber-preservative sales.

Meanwhile, pending the contract signing, orders are constantly being refreshed, the research house said.

Furthermore, the company’s latest agrichemical addition, “active ingredient no. 7” or AI “T”, should start selling soon after a half-year delay.

However, to improve stability and consistency, Ancom is adding another manufacturing step into the process, Kenanga Research said.

Stable-state commercialisation may thus be delayed by six to 12 months as additional equipment should be installed in June followed by fine tuning.

Till then, inputs will be purchased as originally planned, added the research house.

Kenanga Research has maintained an “outperform” call on the stock with a target price of RM1.50 per share.

However, it has cut Ancom’s FY24 net profit forecast by 11% on weaker-than-expected industrial-chemical margins.

“We continue to like Ancom for its position as the largest producer of active ingredients for herbicides in South-east Asia, while also being a beneficiary of the widening ban on Paraquat use and Us-china trade tension as well as being a proxy to global food production and food security goals.”

The risks to its call include a downturn in key crop markets, regulatory risk and foreign exchange translation risk.