Niche Products To Keep Ansell On Firm Footing

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What will business be like for Ansell beyond the heights of the pandemic? Demand is expected to be solid and emanate from other areas beyond PPE

-Pandemic-related demand for PPE expected to ease back
-Yet recovering industrial/surgical activity provides support
-Manufacturing issues loom for Ansell in South East Asia
 

By Eva Brocklehurst

A notable beneficiary of the pandemic, Ansell ((ANN)) is now contemplating what business may be like beyond covid-19, particularly in the case of protective equipment (PPE) such as single-use gloves.

FY22 guidance is for earnings per share of $1.75-1.95 implying, as Morgans asseses, net profit could be down -9% to up 2%, amid multiple risks such as supply imbalances and logistical headaches. The company is also going to undergo a change of CEO.

Nevertheless, the broker believes the re-based business has strengthened, with a much greater focus on PPE and hygiene than before the pandemic. Customers are also looking for long-term agreements and supply certainty.

Organic volumes are expected to remain solid, albeit below the unparalleled levels of FY21, while unprecedented demand for PPE is likely to slow eventually yet not fall off a cliff, the broker adds, as support shifts to other products.

Citi expects growth rates will return to more normal levels beyond FY22, anticipating a contraction of -4% in both sales and earnings in that year, while upside risk remains if permanently high use of PPE occurs in some health care and industrial settings.

Ansell should be net cash by the end of FY23 and the broker expects an ungeared balance sheet beyond the pandemic will offer further upside for acquisitions or buybacks, although these are not included in forecasts.

Margin pressure is likely, Ord Minnett suggests, noting the price of gloves and PPE used during the pandemic has started to fall. The broker expects the impact will be shared between both suppliers and customers.

Yet this has been countered by a recovery in activity, particularly in developed countries, that has in turn supported industrial and surgical gloves. Production has not met demand and shortages exist in surgical gloves, even as inventory is building up in other areas.

Supply Uncertainties

Ord Minnett remains cautious about the Delta wave of coronavirus, which may require extended lockdowns in those countries where vaccination rates are lower. The focus is particularly on South East Asia, including Vietnam and Thailand.

The latest round of lockdowns in South East Asia is disrupting supply across the industry and Morgan Stanley, too, expects this should weigh on the first half results. Still, the broker believes earnings guidance remains achievable, noting the company is exhibiting confidence it can hold on to elevated profits in FY22.

Ansell believes it has mitigating strategies to allow for an expected contraction in examination/single-use gloves such as a shift to higher margin product.

Risks, such as lower demand for chemical body protection and undifferentiated single-use gloves as well as supply disruptions stemming from South East Asian manufacturing are still likely to affect the first half, Morgan Stanley points out. Freight costs and shipping delays may persist throughout FY22.

The sales trajectory of examination/single-use gloves remains difficult to predict, Citi asserts, noting many South East Asian countries that are struggling with covid outbreaks produce the bulk of single-use gloves. On the other hand, the pandemic has also increased demand from the pharmaceutical industry for Ansell's life sciences product.

Credit Suisse is cautious, expecting FY22 earnings will contain some lingering demand related to the pandemic, particularly in the case of the Delta variant, and pricing will be elevated.

The broker, despite management's confidence that earnings growth can be delivered over the medium term, forecasts FY23 earnings will be higher compared with pre-pandemic levels, supported by higher volumes and operating efficiencies, but around -20% below the peak of FY21. Earnings growth is expected to return in FY24.

Results

Unsurprisingly, the company's health care division stood out in the FY21 results with scale gained during the pandemic along with high-efficiency new manufacturing. All key segments such as examination and single-use gloves provided strong volume growth.

The healthcare segment grew 34.8% amid price increases for single-use gloves, while growth in other areas of health care was mainly about volume and appears more sustainable, Citi concludes.

The industrial segment revenue grew 7.1% as demand picked up from the global economic recovery. Ansell generally expects continued strong growth in demand, with the exception from areas that benefited from the pandemic.

Ord Minnett attributes a rapid lift in working capital in the June half to higher input costs and the building up of surplus stocks of examination gloves. The position is anticipated to unwind during coming months as supplies ease because of the production challenges.

While recognising the multiple is undemanding, Credit Suisse considers earnings uncertainty in the short term requires a Neutral rating while Morgan Stanley finds reasons to be Overweight, including a better-than-expected retention of Ansell's market position and the downside risk being isolated to examination/single-use gloves.

FNArena's database has four Buy ratings and three Hold. The consensus target is $44.03, suggesting 17.2% upside to the last share price.

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