Heightened Demand Plays into Ansell’s Hands

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Demand for protective gloves is unprecedented and Ansell is at the forefront of global supply. When will the market return to balance?

-Heightened demand for surgical gloves to remain
-Supply disruptions could still occur
-Yet may take time for PPE to return to balance
 

By Eva Brocklehurst

One of the few companies to benefit from the pandemic, Ansell ((ANN)) has delivered record organic sales and underlying earnings growth in the first half as demand for personal protective equipment (PPE) has been unprecedented.

Even with a strong earnings base in FY21, management is targeting growth of 6-12% and remains confident about demand for the medium term. This is supported by assumptions that, as the pandemic ebbs, global economic growth will accelerate.

Depressed industrial sectors should then recover and safety practices at both industrial sites and hospitals are now heightened, which is likely to play into the company's hands. Morgans believes pandemic has strengthened Ansell's earnings trajectory along with customers looking for long-term supply agreements and amid likely sector consolidation.

The company has upgraded FY21 guidance to US160-170c per share, which represents 51% skew to the second half. Ansell has switched to a pay-out ratio from a progressive dividend, leading to an unfranked US33.2c per share, ahead of forecasts.

In the second half volumes will be cycling a tough comparable yet UBS is confident guidance can be achieved, as normal seasonality favours the second half.

Surgical Gloves

Demand for surgical gloves should continue as the large elective surgery waiting lists are managed over 2021/22. Macquarie notes Ansell has secured new business in categories outside of traditional examination/single-use gloves via the bundling of products.

Examination/single-use glove revenue stood out in the half, up 47.5% amid pricing initiatives and a favourable mix. Pricing is expected to normalise in FY22 but remain above pre-pandemic levels. Growth was largely driven by volume increases and use outside the surgical setting, and demand expected to remain strong for several years as hospitals work through their backlog.

Supply/Demand

The main risk in Ord Minnett's view is the re-balancing of global examination glove supply that could mean a sharp downward adjustment in price if the market moves into oversupply. Ansell has taken advantage of some missteps by competitors, the broker notes, and lifted market share so this does place the business in a strong position as the world economy starts to recover.

Management has indicated supply disruptions could occur amid worsening shipping conditions and container availability. Ocean freight capacity is constrained and second half costs are potentially rising by around 100-300%. Increased raw material expenses are expected to be passed on.

The rolling out of a vaccine may signal the start of the decline in coronavirus but Credit Suisse suspects it will take years for PPE supply/demand to return to balance, given the behavioural changes required over the past 12 months.

Additionally, a recovery in mechanical use gloves and market share gains in surgical and chemical as well as more in-house manufacturing of single-use gloves should support earnings growth.

Morgan Stanley assumes leverage to increased demand for PPE over the short term although, while additional internal capacity may alleviate cost pressures, competitor expansion plans underscore a degree of uncertainty.

Ansell's additional capacity in Thailand is expected to double internal production volumes by FY22-23 compared with pre-pandemic levels. Ansell has also signed multiple long-term supply agreements with several global organisations, partners and hospital groups across countries such as the US, Canada, Brazil and Germany.

The company continues to invest in production of single-use gloves in-house, intent on reducing its reliance on third parties to around 50% from 80%. While the move is sound, Ord Minnett is cautious as it leaves the company more exposed if the market becomes oversupplied.

Still, management argues that demand and prices will remain above pre-pandemic levels and its focus on differentiation will protect from oversupply. Nevertheless UBS ascertains the longer term implications of demand on PPE are difficult to quantify.

Morgan Stanley finds several reasons to remain Overweight on the stock, including expectations for organic growth in FY21 to remain substantially above the 3-5% long-term target. There is also flexibility on the balance sheet, with US$381-564m in headroom for capital deployment.

Rising nitrile prices could pressure small manufacturers, the broker suggests, and this may lead to a more favourable industry structure post the pandemic. Moreover, given the company's view of the severe capacity constraints in PPE it is possible the tailwinds will extend into FY22.

FNArena's database has five Buy ratings and two Hold. The consensus target is $44.18, suggesting 13.4% upside to the last share price. Targets range from $38.30 (Macquarie) to $48.10 (Morgan Stanley).

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