Ansell Grips Restructuring Challenge

This story features ANSELL LIMITED. For more info SHARE ANALYSIS: ANN

-Concerns over top line growth
-Modest impact from cost cutting
-Higher skew to US tax base
-Poor quality FY14 guidance
 

By Eva Brocklehurst

Ansell ((ANN)) has embarked on a major rationalisation of its organisation, impairing brands and IT assets, closing its manufacturing site in Malaysia and discontinuing the Hawkeye military glove business. Given the scale of the company's business, broker reactions were tepid, with most wanting more confirmation the company can rejig growth.

Macquarie considers the changes signal the company wants to keep the newly-acquired BarrierSafe Solutions business relatively distinct. Ansell has created a new "single use" business unit with products for both medical and industrial customers. The speciality unit will be dissolved and products moved to industrial or single use. Macquarie's main concern is the ability to generate top line growth. Thus, management's confirmation the company is tracking at the bottom end of FY14 guidance does little to alleviate those concerns.

 A one-off cost of $34.9m is slated for the restructure with $10-11m in savings from FY16. Ansell will book $90m in impairments, including $19m for its problematic investment in the Oracle ERP (enterprise resource planning) system. The company will discontinue around 30 brands. Brokers also note a considerable offset to the savings will come from a higher underlying tax rate, from earnings being skewed to higher US tax jurisdictions. CIMB thinks all the initiatives are reasonable but the overall cash impact is modest, and there are risks around disruptions and execution of the restructure which need to be monitored closely. There is little room for earnings slippage, in the broker's opinion.

Citi thinks the major issue which the company appears to be trying to address is organic growth, but a lack of balance sheet capacity also means investors are now very exposed to downside risks. Continuing rationalisation of the brands should help but the broker retains a Sell rating. Credit Suisse is also in the cautious camp, with an Underperform rating. The broker wants to see further detail at the FY14 results regarding the underlying operating performance along with evidence of improved gross cash conversion.

BA-Merrill Lynch is relieved the guidance range was reduced substantially, as it removes some of the perceived downside risk, albeit wrapping the impact up in the restructuring. The restructure underscores the broker's view that the company has so many parts that these need to be sized right to support earnings. The writing down of brands with poor growth prospects reveals to Merrills the challenges in forecasting sales in certain product areas. At a group level this leads to low confidence in revenue projections in the absence of strong macro tailwinds. The broker intends to await the second half results before revisiting the investment case and rating, as stronger revenue growth is required before the stock can justify a higher multiple. Given the weight of European earnings, Merrills considers the stock is most leveraged to growth in this region, or a fall in the Australian dollar, over and above any other theme.

JP Morgan is also concerned about deteriorating organic growth, which looks at odds with industrial production data. The broker also questions the quality of the re-stated guidance – for earnings per share in the range of US110-116c – considering it will be bundled with a raft of other initiatives. Moreover, declining input costs for latex and nitrile should have had a material benefit to the company. A lack of organic growth disappoints UBS as well but the broker finds scope for upside over the longer term as management works on the cost base. The stock has outperformed industrial peers over the last three months so UBS takes the opportunity to downgrade to Neutral from Buy.

Despite being surprised by the size of the write-offs, Deutsche Bank observes most of the impact is from legacy products. The broker is more positive regarding the confirmation of FY14 guidance, in the light of difficult trading conditions, and looks forward to stronger organic growth and acquisition synergies as well as reduced operational costs. Deutsche Bank is the sole Buy rating on the FNArena database. Thereafter is a mixture of three Hold and four Sell ratings. The consensus target is $19.85, suggesting 3.0% upside to the last share price. This compares with $19.21 ahead of the announcement. Targets range from $17.70 (Macquarie) to $22.50 (Deutsche Bank).
 

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