Australia | May 07 2007
By Chris Shaw
For some months Southern Cross Equities has been positive on the prospects of Ansell (ANN), suggesting there was upside in the share price as the company transformed into a higher growth play.
Continuing this growth strategy the company has acquired Blowtex of Brazil, a company with around 20% of what is the world’s fifth largest condom market. The acquisition on its own appears unlikely to drive the stock higher, but it does show the company’s capacity to grow its market share and to enter into new markets.
According to both GSJB Were and UBS the deal should be earnings neutral in FY07, Weres pointing out it represents only around 1% of group sales. Neither broker has adjusted its earnings estimates as a result, though UBS points out the deal should prove slightly accretive in FY08.
The broker is estimating earnings per share of 65c this year and 69c in FY08, while the GSJB Were forecasts are for 64.3c this year and 74.2c next year. Thomson One Analytics shows median estimates of 63c and 76c respectively.
Southern Cross’s forecasts are for 58.1c this year and 79.7c next year, while it suggests the acquisition is evidence of the opportunities to be found in new markets. With the Brazilian condom market growing at double-digit rates thanks to a government distribution program the deal looks good in terms of filling the company’s manufacturing capacity, UBS noting the company currently supplies 13% of global demand but has the capacity to lift this to 18%.
With this in mind Southern Cross expects the company to increase the operating capacity in Brazil, as such a move would allow it to bid on larger tenders. UBS also suggests the deal as likely to be the first of many, as on its estimates the company has a war chest of around US$200m available for additional purchases.
Further upside could also come from cost savings, as the broker notes there is potential for a consolidation of the company’s manufacturing facilities, with evidence of gains here likely to emerge late in FY08 or early in FY09.
Southern Cross also sees upside from savings, noting management in the Asian manufacturing operations appears focused on improving efficiencies and taking advantage of lower costs of production provided by the company’s technology. This technology is also proving beneficial in terms of product innovation, the broker pointing out this is helping management grow market share while preserving the value of its local brands.
The broker continues to rate the stock as a Buy, with a price target of $14.00. UBS is similarly positive in its rating and has a $13.19 target, while Thomson One shows a median price target of $13.12.
Overall the FNArena database shows the stock is rated as Buy twice, Neutral twice and Reduce once, with an average target of $12.42. Shares in Ansell are little changed in early trading, as at 10.45am the stock was down 3c at $11.46.