Acquisitions The Wildcard For Ansell

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This story features ANSELL LIMITED.
For more info SHARE ANALYSIS: ANN
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Late last year shareholders in Ansell ((ANN)) gave approval for the company to buy back up to 10% of its issued capital and the board has taken them up on this, last week announcing a share buyback of five million shares of 3.7% of the stock on issue.

The significance for the market is not that the buyback is going ahead as while both GSJB Were and Merrill Lynch agree it will be marginally earnings accretive but that as Merrill Lynch notes the move won’t preclude the company from pursuing further acquisitions in its markets, providing some acquisition growth to go with what is already seen as a strong organic growth outlook.

The broker points out recent deals have been in the $50 million range and given the company is generating around this much in free cash flow each half year, the proposed buyback is unlikely to cause any problems in terms of pursuing further deals.

As well Merrill Lynch notes gearing is quite low at around 9% currently and this opens the way for any acquisition to have a reasonable debt component, the broker estimating a purchase up to $200 million could be accommodated on a 50% debt/50% equity basis. GSJB Were largely agrees, its estimates suggesting around $100-$150 million is available in debt capacity at present.

Both brokers anticipate good earnings growth regardless of further deals, GSJB Were not including the latest buyback in its forecasts but still seeing earnings per share (EPS) growing from last year’s US50.5c to US61.4c this year and US71c in FY09, while Merrill Lynch has added the buyback into its numbers and come up with forecasts of US63.6c and US75.1c respectively.

The broker suggests such earnings growth makes the stock cheap, as it is currently on a 12-month forward P/E (price to earnings ratio) of 14.8x despite offering EPS growth of 18% both this year and next. Supporting its view the broker notes latex prices, which represent a major input cost for the company, are becoming less volatile and if this trend continues the group is better placed to pass on such cost increases to customers, which would be a positive for margins.

With this offering increased confidence to its estimates the broker retains its Buy rating based on a valuation on the stock of $14.20, at which price it has set its target. GSJB Were is a little less agressive in it rating and sticks to a Hold recommendation with a target price of $12.51.

The FNArena database shows the company scoring a total of three Buy ratings and four Hold recommendations, with an average price target of $13.06, UBS being the low mark with its $12.23 target and Merrill’s the most optimistic. The median price target according to Thomson One Analytics is $12.97.

Shares in Ansell today are slightly stronger in line with the overall market and as at 11.50am the stock was up 11c or around 1% to $11.34, which compares to a trading range over the past 12 months of $10.25 to $13.40.

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