KUALA LUMPUR (Dec 12): RHB Research is projecting a three-year earnings compound annual growth rate (CAGR) for Ancom Nylex Bhd of 26.1% from financial year ended May 31, 2022 (FY22) to FY25 on new income streams and cost savings from additional stakes in businesses, as well as the introduction of new agriculture active ingredients (AIs) chemicals.

The research house's analyst Queenie Tan believes Ancom Nylex's valuation is inexpensive, given its global presence and leading position in agrichemical AIs, and its earnings growth potential being higher than the peer average.

Although the stock is currently not rated by RHB Research, its estimated fair value of RM1.19 translates into 16 times price-to-earnings ratio (PER) for 2023 earnings, which is at a 15% discount to the international agrichemical peer average two-year forward PER.

"Ancom Nylex is riding on its global presence, pricing power, launching of new AIs and capacity expansion. This, on top of the catalyst of the paraquat ban in Thailand and Brazil, leads us to project a three-year earnings CAGR of 26.1% for the stock.

"Its current market valuation of 13 times [calendar year 2023 PER] is inexpensive, given its higher earnings growth potential versus the peer average," she wrote in a note on Monday (Dec 12).

Tan noted that Ancom Nylex strives to increase its product range by launching more AIs into the market progressively with its new 70,000 sq ft plant in Klang will facilitate the production of new AIs, with total annual sales potential of RM139 million per annum.

As the sole producer of AIs in Southeast Asia, coupled with its global product registrations, she added that Ancom Nylex has well established its solid pricing power and distribution capabilities by cross-selling new products to existing customers and countries.

"Going forward, [Ancom Nylex] management expects to capture a larger market share in Thailand and penetrate the Brazil market as customers look for a replacement for paraquat ban, after installing two more production lines for its products, Diuron and monosodium methanearsonate," she said.

In 2020, Thailand and Brazil joined 29 other countries in banning the use of paraquat, a widely used herbicide that is highly toxic to people and animals, with the ban having created a huge vacuum in both the Thailand and Brazil markets. Meanwhile, two of Ancom Nylex's formulations — Dasaflo and Monex HC — are identified as close but safe substitutes to paraquat.

Despite an expected slowdown in industrial chemical production — due to softening demand for ethanol and methanol — demand for Ancom Nylex's agrichemical products remains robust, according to Tan.

Indonesia, where Bromacil is Ancom Nylex's registered product, is the second largest producer of pineapples in the world. Ancom Nylex also recently launched Ester, a product targeted at the Australia market, to be in time to capture the expected 3% growth of the cereal market in Australia next year.

"Meanwhile, it also expects to launch Chemical T for cane crops in Brazil, which harvests the most sugar cane globally, South Africa, Australia, and the US," said Tan, who gave a fair value of RM1.19 on Ancom Nylex despite a "not rated" call.

As of Monday noon break, Ancom Nylex's shares were unchanged at 97.5 sen, bringing the group a market capitalisation of RM903.63 million.