Australia | Apr 29 2021
This story features ANSELL LIMITED. For more info SHARE ANALYSIS: ANN
Ansell has been a beneficiary of the pandemic, causing another upgrade to earnings guidance. Is permanently higher demand for protective gloves a prospect?
-Larger healthcare market post the pandemic
-Industrial revenue growth likely to accelerate
-Further upside exists if share/margins can be maintained
By Eva Brocklehurst
Demand for personal protective equipment (PPE), namely specialty gloves, remains elevated and has put Ansell ((ANN)) in line for a strong result in FY21. Moreover, several brokers are starting to envisage permanently higher usage of PPE in certain segments.
Indeed, Morgan Stanley calculates the post-pandemic health care market will be 4% larger, although still expects a slowdown in healthcare sales as demand generated by the pandemic eases from FY22. On the flip-side industrial revenue growth is expected to accelerate through the second half of FY21 and FY22 as vaccination rates increase and industrial activity resumes.
Ansell's guidance upgrade, the fourth in six months, has signalled price increases for examination and single-use gloves and a recovery in mechanical and surgical gloves.
With all its segments firing, the company provided guidance for earnings per share of US192-202c. In total, the range implies 54-68% growth in the second half, despite the cycling of 11% growth from the second half of FY20, Credit Suisse points out.
Despite a "supernormal" performance in FY21, the broker expects a similar outcome in FY22, forecasting earnings per share of US194c, supported by continued demand stemming from the pandemic.
Morgans agrees, believing the pandemic has strengthened the company's position amid a greater focus on PPE and hygiene. Moreover, distributors are also looking for long-term agreements and supply certainty, and there is the prospect of sector consolidation.
Ord Minnett expects some of the features of the pandemic will ease off in FY22 as demand for PPE drops and prices level off while operating costs rise. Still, earnings should be well above pre-pandemic levels because of a recovery in industrial production and elective surgery.
Ansell is expected to extend its market-leading position and the broker forecasts revenue growth of 14% in industrial gloves in FY21 and 42% in healthcare. Further upside to forecasts is also envisaged if Ansell can maintain recent share gains and/or if gross profit margins remain above historical levels.
Examination glove prices have likely plateaued as supplies are catching up with demand, but with the pandemic accelerating in several countries the broker observes demand is still high.
Industrial trends may be favourable and there is a strong balance sheet but Macquarie is more cautious about the sustainability of examination and single-use glove growth over the medium to longer term, given increasing competitor capacity.
Yet the delay for new industry capacity to come on line means it is probable that examination/single-use gloves will be in short supply through all of FY22, Credit Suisse asserts, and this is likely to remain the major driver of elevated earnings because as long as there is an imbalance between demand and supply, the current high price of gloves will continue.
Ord Minnett envisages upside to forecasts if Ansell can maintain recent share gains and/or if gross profit margins remain above historical levels. The broker points out a stronger Australian dollar should offset much of the positive impact of the earnings increases on valuation.
Morgans increases revenue assumptions across both industrial and healthcare businesses and expects higher sales across key products, noting margins have increased materially given the higher pricing, improved efficiencies and volumes.
Citi anticipates PPE use will continue at heightened levels until the pandemic is under control and assumes elevated revenue growth amid a bouncing back of elective surgery volumes.
The ungeared balance sheet also provides further upside potential in the form of M&A and/or buybacks. The broker assumes sales will normalise in FY23 but concedes there is upside risk beyond FY22 if permanently high use of PPE occurs in the health care and industrial settings.
FNArena's database has five Buy ratings and two Hold. The consensus target is $45.42, suggesting 6.0% upside to the last share price.
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