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Global Production Risks Dent Ansell Outlook

Australia | Aug 13 2019

Ansell is confident sales can recover in FY20 after a weak period affected by divestments and restructuring, although brokers consider the global environment poses risks.

-Negative impact on body protection manufacturing from trade issues and slowing industrial production
-Acquisitions, more aggressive buyback can push EPS to the top of guidance
-Value envisaged from strong balance sheet and transformation program


By Eva Brocklehurst

Brokers hope the protective glove manufacturer Ansell ((ANN)) will be a clearer business to assess in FY20 after a complicated year when the sexual wellness division was divested and the remainder restructured. Management is confident that organic sales can recover in FY20, although several brokers suspect this is optimistic, even allowing for the positive trend in healthcare sales.

This is because of the company's exposure to the unpredictable and increasingly negative impact of trade issues and an associated slowdown in industrial production. Citi is relatively upbeat, suggesting the global nature of the product range and the reliance on industrial production across many markets means there are always ups and downs at the top line.

The broker points to solid revenue growth in the healthcare segment and management's comment that market share has increased. Morgan Stanley also notes Ansell's exposure to non-cyclical industries and healthcare is encouraging for the outlook. The broker expects a turnaround in raw material inputs, which negatively affected FY19, should provide a tailwind in FY20 and Ansell should at least trade in line with historical averages.

The company is targeting earnings per share (EPS) in FY20 of US$1.12-1.22 and management expects growth will be forthcoming, despite the deterioration in the global economy and the uncertainty over trade. The guidance, at the mid point, does not appear to be a stretch to UBS, which calculates US$1.18.

Acquisitions and a more aggressive buyback also have the potential to push EPS to the top of the guidance range, although one key assumption is that there is no further deterioration in the global economy.

Ansell envisages 3-5% sales growth in FY20 but, with no sign of improvement in the macro environment, Credit Suisse forecasts a miss to this target in the first half and suggests FY20 is likely to be all about cost reductions and the buyback. Macquarie agrees the macro economic trends present downside risk to FY20, despite favourable raw material pricing trends and the benefits from the transformation program.

Cost adjustments muddied the FY19 result and underwhelmed brokers. FY19 net profit of US$150.9m was up 2.9%. Sales from continuing operations rose 0.6%. The quality of earnings was affected by significant transformation costs, a provision release and a lower tax rate.


After buying back US$176m worth of shares in FY19, Morgan Stanley estimates net debt/operating earnings of around 0.6x, versus the company's target range of 1.5-2.0x. Management has signalled that excess cash will be deployed for either acquisitions or buying back shares.

Ord Minnett forecasts similar weak growth in FY20 amid signs that economic conditions are deteriorating. A 4% lift in the health division is expected while flat sales are expected in the industrial division. Despite some misgivings, the broker envisages limited downside for the stock because the balance sheet offers potential support to earnings via further capital management or acquisitions.

Morgans includes a 10m share buyback in forecasts for FY20, with 5m in FY21-22, driving growth in earnings per share of up to 6%. The broker notes channel partnerships continue to expand and the transformation program is delivering ahead of plan, while there was solid growth in emerging markets.

EMEA Support

A recovery in Russia and Brazil and growth in China and Mexico, as well as price increases and product mix, should underpin FY20, in Citi's view. Automotive manufacturing is the largest industrial segment for the company so the broker was not surprised that Europe, Middle East and Africa (EMEA) were weak.

The Ringers acquisition in January 2019 is expected to add to growth in FY20 and there is the potential for an expansion of the product range sold in the oil & gas industry to more geographies as well as mining and heavy machinery.

Currently, these products are mainly sold in the US and to a lesser extent the Middle East. As the company has a global footprint, Citi assesses that possible there is upside risk to the 10% revenue growth expected from the acquisition, although does not include this in forecasts.

UBS believes management should be commended for handling a very patchy global growth environment in FY19 as it implements a large restructure. Nevertheless, the broker looks forward to FY20 where non-recurring items feature less, allowing for more meaningful analysis of performance.

Credit Suisse downgrades to Neutral from Outperform, given the strength in the share price in the wake of the results. The broker continues to envisage merit in the transformation program and strong balance sheet but remains cautious about continued weakness in the global environment and the implications for revenue and earnings.

FNArena's database shows two Buy ratings and five Hold. The consensus target is $28.29, signalling 3.2% upside to the last share price. This compares with $27.56 ahead of the results. Targets range from $25.69 (Morgans) to $31.60 (Morgan Stanley).

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