More Needed From Ansell

This story features ANSELL LIMITED. For more info SHARE ANALYSIS: ANN

-Fair price tag, modest accretion
-Boosts Ansell's top line growth
-Undermined by patchy conditions
 

By Eva Brocklehurst

Ansell ((ANN)) has rounded out its product portfolio with the acquisition of a chemical protective clothing manufacturer, which brokers envisage will complement the company's other protective clothing segments. The acquisition of UK-based Microgard for GBP59m is expected to be accretive to earnings in FY16. Microgard's manufacturing facilities are in China and it sells its range across 75 countries.

The acquisition fits nicely within Ansell's industrial portfolio, in Morgan Stanley's view. Moreover, the balance sheet remains robust and flexible. The broker estimates the transaction is 3% and 4% accretive in FY16 and FY17 respectively. The acquisition offers a high margin, semi-disposable product with associated revenue synergies. Ansell has leverage to the falling Australian dollar and Morgan Stanley also believes the benefit from falling input costs is yet to fully play out.

This is a sensible acquisition, in Credit Suisse's view, expanding the product offering and following on from the acquisitions of Trelleborg, high-end, higher margin product, and Barriersafe, light-weight, lower-margin product. The broker also envisages cross-selling opportunities in gloves and boots and potential for further consolidation within the space, given the highly fragmented nature of the market. The consideration is reasonable and consistent with recent transactions, while the multiples imply a margin of 25% for Microgard, ahead of the 16% margin Ansell recorded at the group level in 2014, Credit Suisse observes.

The first acquisition in a year signals to JP Morgan that the company is turning back to acquisitions to boost top line growth within the industrial segment, particularly at a time when customers are demanding that savings from declines in raw materials be passed on. The price tag appears reasonable to the broker and marginally dilutive in FY15 while accretive in FY16. JP Morgan does not expect the dilution to FY15 will be outside management's previous guided forecast range of US118-126c per share.

Nevertheless, with weakness in underlying growth evident in the first half, and this acquisition confirming suspicions about the need for top line growth, JP Morgan is reticent about recommending the stock. Synergies should deliver margin benefits but these may be eroded by effects of discounting. The broker believes patchy economic conditions and discounting will provide headwinds for the business for some time. An Underweight rating is maintained.

The forward earnings multiple of eight times is reasonable in Deutsche Bank's view, given an uncontested sale process and the elevated state of asset prices. The sales boost from this low-risk acquisition should help what this broker also considers is weak organic growth. Deutsche Bank's forecasts are slightly diluted in FY15, because of acquisition costs, but accretion of 3.0% is expected in FY16, based on the low cost of debt. Modest cost synergies are expected from lower input costs but the revenue synergies should be more material in the medium term, given Ansell's potential to leverage global distribution.

Morgans takes the view that market conditions are challenging and integration risks should not be overlooked. The deal is considered incrementally positive as it will enhance the sales proposition in protective clothing while the purchase price appears reasonable as well. That said, the broker envisages little room for earnings slippage and, with a Hold rating, advises investors to await a better entry point.

Ansell retains a range of ratings on the FNArena database with two Buy, three Hold and three Sell. The consensus target is $25.42, suggesting 10.9% downside to the last share price. Targets range from $20.98 to $30.00.

 See also, Ansell's Outlook Far From Smooth on February 11 2015.
 

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