ANCOM Bhd — a locally listed diversified group controlled by prominent businessman Datuk Dr Siew Ka Wei — is the holding company of Main Market-listed Nylex (M) Bhd and ACE Market-listed Ancom Logistics Bhd.

While most investors may be aware that Ancom produces and distributes industrial chemical products via its 48.95%-owned Nylex, many may not know that its wholly-owned Ancom Crop Care Sdn Bhd (ACC), which makes agricultural chemicals, is actually its most profitable business unit.

ACC, which manufactures and distributes herbicide products, generated a net profit of RM35 million in the financial year ended May 31, 2019 (FY2019). The company is said to be worth over RM500 million, based on a price-earnings ratio (PER) of 15 times.

For comparison, its closest peer Hextar Global Bhd — formerly known as Halex Holdings Bhd — acquired Hextar Chemicals Ltd (HCL) for RM597 million in April in a deal that valued HCL at 13.75 times its 2017 net profit of RM43.4 million.

Coming back to Ancom, what is interesting is that its market capitalisation was a mere RM109.65 million based on its closing price of 49 sen last Thursday. In other words, Ancom’s shares are undervalued as the investing community has yet to recognise the potential of ACC, whose intrinsic value is trapped under the group.

Ancom CEO Lee Cheun Wei says the group is looking at ways to unlock the value of ACC, which has grown rapidly over the last four to five years.

“The value of our agricultural chemicals business is not fully reflected in Ancom’s prevailing share price because not many investors are aware that ACC is so profitable,” he tells The Edge in an interview.

Lee, 45, has been at the helm of Ancom since January last year and been ACC’s managing director since July 2014.

One way for Ancom to unlock its value, he acknowledges, is for the group to continue to ensure growth and sustainable profits from its agricultural chemicals division and, at the same time, reduce losses from other non-performing business units.

“By doing that, the profitability of Ancom Bhd will be improved significantly in the future. But unfortunately, we still have some other businesses that are burdening us in terms of debt and their related financial costs are eroding the profitability of the group,” he explains.

If Ancom can stop the bleeding from its non-performing businesses and Nylex is able to get its profitability back to a normalised level, the group’s overall profitability will naturally increase in the near future, he adds.

In the financial year ended May 31, 2019, Ancom’s net profit declined 14% year on year to RM15.13 million.

For perspective, the agricultural chemicals business reported an earnings before interest, tax, depreciation and amortisation (Ebitda) of RM53 million and profit before tax (PBT) of RM47 million in FY2019 while the industrial chemicals segment recorded an Ebitda of RM27.8 million and PBT of RM4.6 million.

Although the industrial chemicals division remained the largest revenue generator, contributing about 70% to Ancom’s top line in FY2019, the agricultural chemicals division has become the largest profit generator, contributing about 75% to the bottom line.

The latter also generated a higher PBT margin of about 15%, compared with about 2% for the industrial chemicals division.

Looking for a strategic investor

Lee says another way for Ancom to unlock value is to divest its shares in ACC to a new strategic investor.

He observes that if new buyers purchase a stake in ACC based on market valuations, its true value will be reflected in Ancom’s share price because the purchase price would have to be marked to market.

“If a third party is keen to take up a stake in ACC, Ancom might seriously consider how we can complement each other’s strengths and expertise,” he says.

Lee reveals that Ancom is currently in preliminary talks with potential investors from China, the US, Germany, Brazil and India. But given that Ancom believes its agricultural chemicals division is still in high-growth mode, the group is not in a hurry to divest.

“We prefer to take a mid-term view. If we are only keen to take a short-term view, we would find a buyer and sell our stake in ACC as soon as we can for a handsome sum. But that’s not our main focus right now. We are not that desperate.

“As much as we want to unlock the value of our agricultural chemicals business, there is no urgency to do so because ACC is still able to grow independently at its own pace.”

In any event, Lee says Ancom intends to retain a controlling stake in ACC because it is its cash cow and the most profitable business unit in the group.

“We are not interested to sell the whole agricultural business entirely to outsiders. We are interested to find a strategic partner to grow the business with,” says Lee, adding that Ancom is only willing to divest 25% to 30% of ACC at best.

“If they (partner) could provide us greater synergy, new technology and technical know-how that enables us to develop more active ingredients, they would be a perfect fit for us,” says Lee, who remained tight-lipped about the potential investors. “I can’t give you their names, but what I can share with you is that they are mainly agricultural chemicals players. Just like us, they are also key players in the global agricultural chemicals market. We are always in talks with potential investors and other industry players to explore possibilities.”

On ACC’s forte, Lee says it is in producing agricultural chemicals for the sugarcane industry.  Thus, Ancom has to consider how this portfolio would fit its potential partner’s core business. “In the past two years, we have been talking to some companies from China to help us develop two to three new active ingredients. We need technology, we need equipment, we need new customers and we need to register more new products.”

In addition to sugarcane plantations, ACC’s products are especially suitable for oil palm plantations. The local market contributes about a third to ACC’s revenue, with most of it derived from the palm oil sector.

Outside Malaysia, Brazil — the largest sugarcane producer in the world — contributes the most to ACC’s revenue, accounting for more than 10%.

ACC is an integrated player that has the capability to produce its own active ingredients, sell technical-grade intermediates to other formulators, as well as formulate end-products using its own active ingredients and formula.

“What makes us different from other players is that ACC is a molecule producer or synthesizer, whereas most of the other local players are agricultural chemicals formulators. They would have to buy active ingredients from suppliers from China and India to produce their end-products,” Lee explains.

In other words, ACC covers the upstream and downstream businesses, whereas its competitors are mostly downstream players.

“We are probably the only company in the region that is equipped with such a core competence and capability. That’s one of the reasons why our profit margins are better than those of other players,” says Lee.

Currently, ACC is selling its unique products to over 40 countries, including the US, Mexico, Jamaica, Honduras, Cuba, South Africa, Kenya, Nigeria and Japan. It also sells to selective Asean countries through its global distribution networks.

“We will continue to leverage and capitalise on our core competence in producing synthetic molecules. As part of our ongoing expansion, we plan to develop and produce another two to three active ingredients in the coming years,” Lee adds.