Australia | Nov 20 2006
By Chris Shaw
With the market at record levels and corporate activity hotting up the search is on for companies offering both earnings growth potential and corporate appeal, Southern Cross Equities suggesting Ansell (ANN) fits the bill on both counts.
The broker has initiated coverage on the stock with a Buy rating and a $13.00 price target, which suggests solid upside when compared to a current share price of around $11.00.
The attraction of the stock in the broker’s view is management has developed three businesses with leading franchises in the global market, namely industrial gloves, medical gloves and condoms. Analyst Stuart Roberts sees solid growth potential in all three areas in coming years, particularly as while latex prices will have a negative impact on earnings this year it should not be so severe going forward.
There is evidence the combination of technological innovation and the company’ strong market position is already beginning to offset the impact of high latex prices, as the broker notes the June half year showed sales growing significantly faster than world growth for the first time. In comparison, for the four years to FY06 the company was only able to achieve core revenue growth of around 3.6%.
The recent surge is a reflection of product innovation by management, as the company is now generating around 10% of revenue from new products each year. Southern Cross Equities sees such solid growth as sustainable as in its view the company now has a high growth core combined with a solid growth range of products and some that have become commoditised, with the high growth core representing the greatest proportion of group sales.
This trend is expected to continue as while the company’s premium gloves are more expensive they are also more cost effective for users, so the outlook is for stronger sales of high margin products.
In the broker’s view the timing is also right to look at the stock, as the twin problems of currency exposure and higher latex prices are now not the issue they have been. Roberts notes the improvement in rubber future allowing the company to put in place more forward sales agreements will limit the risk of adverse latex price movements going forward, while he expects management to continue to manage its euro revenue exposure.
The latex pricing issue will impact this year, as evidenced by management’s profit warning a few months ago. The broker is forecasting earnings per share in FY07 of 63.7c, down from the 71.1c achieved in FY06. A strong recovery is expected though, the broker forecasting FY08 earnings of 75.2c, rising to 91c in FY09. This puts the stock on a FY08 P/E of less than 15x, which seems reasonable value in the current market.
In terms of corporate appeal the broker suggests any sell-off as a result of a latex price induced impact on earnings would make the stock attractive, as with low gearing, strong cash flows and strong market positions it fits the bill for private equity players.
Southern Cross is in line with market forecasts for FY08 but more optimistic in FY09 as Thomson One Analytics shows median earnings per share estimates for the two years are 78c and 83c. The median target price estimate is $11.39, which is above the average according to the FNArena database of $11.07.
The database shows the stock as being rated as Hold by all five leading brokers covering the stock, so the Southern Cross Equities view offers a different perspective. Ansell shares today are weaker in line with the broader market, as at 12.00pm the stock was down 17c at $10.89.