ANCOM Bhd is hoping to capitalise on a ban on paraquat use in Thailand and Brazil as it believes its products to be good substitutes and well accepted in those markets.

After the toxic chemical was banned in Thailand and Brazil in 2020, a huge vacuum was created in the two big markets, observes Ancom group CEO Lee Cheun Wei.

“Paraquat was banned in these countries because it was classified as class-1 poison. This is a favourable situation for us because we see tremendous opportunity in these replacement markets,” he tells The Edge in an interview.

According to him, two of Ancom’s formulations — Dasaflo and Monex HC — are identified as close substitutes to paraquat, which was estimated to have a global market size of around US$850 million in 2020.

“Since 2021, our exports to Thailand have increased significantly, and we expect them to improve further this year. Meanwhile, we are also working on getting these products to Brazil for the soybean industry,” Lee says.

Paraquat is widely used as a herbicide — also commonly known as “plant killer” — primarily for weed and grass control. Given its highly poisonous nature, paraquat is also used by the suicidal, especially in many developing countries.

A check on Pesticides Action Network’s (PAN) Europe website shows that other countries which have banned the use of paraquat include Denmark, Slovenia, Austria, Finland, Sweden, Kuwait, Syria and Cambodia.

Lee says in Thailand alone, the paraquat replacement market is said to be worth US$60 million to US$80 million a year. Based on Ancom’s back-of-the-envelope calculation, the chemical firm has thus far captured about a tenth of the Thai replacement market.

“So far, we still haven’t penetrated into the Brazil paraquat replacement market, which is about five times larger than the Thai market. Brazil has sugarcane, corn and soybean fields. There are a lot of opportunities for us to explore,” he notes.

Soon to be known as Ancom Nylex Bhd, Ancom saw its net profit more than double to RM21.11 million in the first half ended Nov 30, 2021 (1HFY2022), from RM9.25 million a year ago. With two more quarters to go, the group is only RM2.7 million shy of FY2021’s net profit of RM23.8 million.

Lee points out that Ancom’s profitability continues to be driven by its agricultural chemical unit Ancom Crop Care Sdn Bhd (ACC).

“Going forward, with the acquisition of the remaining 50% stake in Nylex (Malaysia) Bhd being completed, we will be able to consolidate Nylex results from 4QFY2022 onwards,” he adds.

Consolidation of Ancom and Nylex

In a cash-plus-share deal, Ancom took over all the assets and liabilities of Main Market-listed Nylex for RM179.3 million. The disposal was completed last Wednesday, leaving Nylex a listed shell with cash.

“Many people had asked us before, why didn’t Ancom sell Nylex when the latter was loss-making. But we were very sure that we wanted to ride the recovery of Nylex,” Lee stresses.

“In hindsight, our strategy was correct. Instead of selling Nylex, we managed to turn around the company. Now that we own a 100% stake in Nylex, its earnings contribution to Ancom will double,” he says.

Nylex has two principal activities — manufacturing and trading. When commodity prices are on a downward trend, the group’s trading business will be affected, as it is essentially a stockist. But when commodity prices rise, Nylex profits from the boom.

Lee acknowledges that during the various forms of lockdowns, Nylex’s business was badly affected. But now that things have improved on the Covid-19 front and with factories resuming operations, he anticipates Nylex’s financial performance to return to pre-pandemic levels.

“Moreover, prices of industrial chemicals are quite good at the moment, so it should augur well for us. Overall, I would say it’s going to be an exciting time for Ancom Nylex Bhd, our proposed new company name that better reflects our two core businesses.”

Besides the lockdowns, Nylex’s net loss of RM25.7 million in FY2020 was also attributed to the weakened oil and commodities prices and margins, no thanks to the oil supply glut resulting from the Saudi Arabia-Russia price war.

Lee says Nylex is very much an industrial chemical trading house, as the group buys in bulk from all over the world, and then resells the chemicals in Malaysia, Singapore, Indonesia and Vietnam.

“We would like to think that the worst is over for Nylex, and therefore, we are very excited about what is ahead following the completion of the consolidation with Ancom,” he reiterates.

Ancom executive chairman and Nylex group managing director Datuk Siew Ka Wei concurs.

“With the completion of the acquisition of Nylex’s assets and liabilities, it would enhance our efficiencies and ultimately boost our earnings. For us, one of the most important things in business is forging strategic alliances and partnerships so that we can keep growing,” he observes.

Siew is the single largest shareholder of Ancom, with an equity interest of 22.14%. Meanwhile, Pacific & Orient Bhd, a Main Market-listed insurer controlled by Chan Thye Seng, is the second largest shareholder of Ancom, with a 6.04% stake.

Over the past 12 months, shares of Ancom have almost tripled to RM3.35 last Friday, which translates into a market capitalisation of RM870.56 million.

Interestingly, Lee is also a substantial shareholder of Ancom, with a 5.55% stake. He says the board of directors and the management team have put in a lot of effort to unlock Ancom’s value and it is now starting to bear fruit.

“I’ve been mopping up Ancom shares myself, and I will continue to increase my shareholding in the company. In fact, I’ve been actively accumulating Ancom shares since 2014, and I’ve been rewarded for believing in this company,” he remarks.

On the long-awaited reverse takeover (RTO) of Ancom Logistics Bhd by S5 Holdings Inc, Lee updates that the heads of agreement expired this month — 18 months after it was signed in July 2020 — and the parties are now extending the negotiation period for another three months.

“Frankly, we don’t run S5, so we don’t know the reasons for the delay. As it is, S5 asked for an extension; they told us the transaction is progressing further, so we agreed. From our perspective, we have been waiting for so long, we wanted this deal to go through,” he says.

Lee, however, points out that there are other candidates knocking on the door as they are interested to take over the listed status of Ancom Logistics, which is 33.96%-owned by Ancom.

“To us, whoever the buyer is, it doesn’t make a big difference to the direction of the group going forward because we would be diluted to a minority stake post-RTO. After all, we are just surrendering our listing vehicle as part of our consolidation plan to refocus on our core businesses,” he explains.

Venturing into livestock chemicals

A new segment being eyed by Ancom is the business of livestock chemicals. Last December, Ancom announced plans to venture into the segment by acquiring an 80% stake in Shennong Animal Health (Malaysia) Sdn Bhd and Vemedim Sdn Bhd — collectively known as Shennong Group — for a total of RM23.92 million in cash.

Ancom head of investor relations Andrew Leong says upon completion of the acquisition — hopefully by end-February — Shennong Group will be parked under ACC.

“We think the two business units have a similar business nature. ACC provides solutions to the plantation sector, whereas Shennong Group provides solutions to the livestock industry. Both are agriculture-related businesses. You could say that we are diversifying the income stream for ACC, which already has economies of scale,” he explains.

Moreover, Shennong Group can tap ACC’s established distribution network.

“There are some synergies to be derived: The businesses are scalable and the potential for growth is there. With the addition of the livestock chemical business, we believe Ancom will become an even bigger and more integrated chemical player than we already are,” Leong observes.

He opines that Shennong Group and ACC are a perfect match, as the proposed acquisition comes with an earnings guarantee of RM4.6 million in profit after tax per year for 2022 and 2023.

“We are happy that the existing owners of Shennong Group have committed to stay with us for the next two years and grow together with us,” he adds.

Shennong Group currently serves mostly local customers, namely livestock chemical distributors, poultry farms, as well as swine and fish farms.

“We intend to export to other countries with high livestock production, such as Brazil, in the future. But for now, we will be focusing on expanding our local market,” Leong says.