Ansell Has It Covered

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

 – Ansell delivers solid result
 – New products and emerging markets support growth
 – Upside risk from additional acquisitions
 – Macquarie upgrades to a Buy rating

By Chris Shaw

Consensus earnings per share (EPS) forecasts for latex healthcare and safety product manufacturer Ansell ((ANN)) for FY12 were around US103c, so a result of US101.4c was generally regarded as good enough given tough operating conditions in the period in Europe in particular.

For Deutsche Bank the highlight of Ansell's result was stronger group margins, as these were achieved despite the company having some issues and unexpected costs stemming from the implementation of a new system designed to replace numerous legacy systems being used. As noted by Bell Potter, the new enterprise resource planning (ERP) system from Oracle forms a key part of Project Fusion, which aims to improve Ansell's ability to respond to customer needs.

Management at Ansell has guided to EPS in FY13 of US107-112c, which would represent growth of 5-10% from FY12. Driving the increase will be new product launches, along with further synergies stemming from the recent acquisition of Comasec.

As Deutsche notes, Ansell is set to launch more than 40 new products across all divisions in FY13. This level of new product launches is expected to become the norm as Ansell attempts to stay ahead of competitors. 

New products should underpin earnings growth expectations in the view of BA Merrill Lynch, especially given Ansell will be cycling weak comparable revenue numbers for the key industrial division in particular in the first half of FY13. 

Bell Potter agrees, noting Ansell typically generates around 20% of revenues from products less than three years old. A new global business unit structure should help in this regard, as it will allow for greater innovation and marketing attention for neglected products and customer groups.

The Specialty Markets division offers an example of this, as improved focus has lifted margins and sales in this division over the past year. 

Another positive to Ansell's earnings growth outlook is increasing penetration in emerging markets. As Macquarie points out, emerging market sales grew by 18% in FY12 compared to no growth in developed markets, with emerging markets now accounting for almost one-quarter of Ansell's total sales. 

Following the Comasec acquisition, Deutsche estimates Ansell has around US$200 million available for further acquisitions without exceeding the group's gearing target of 30%.

Earnings per share forecasts for Ansell suggest solid growth, as consensus forecasts according to the FNArena database stand at US110.1c in FY13 and US126.3c in FY14. In most cases brokers have made minor revisions to earnings estimates.

Aside from still difficult economic conditions in some major market such as Europe, a possible constraint to earnings growth noted by JP Morgan is latex prices. While Ansell was a beneficiary of significant price rises in FY11 as compensation for rising Natural Rubber Latex prices, latex prices are now falling.

This is likely to pressure Ansell to pass on some of these price falls to customers, something management has acknowledged is already occurring on bigger contracts. At present the plan is to pass through less than 50% of the benefit, which JP Morgan suggests offers scope for some market share losses.

With FY12 earnings demonstrating resilience in the face of tough market conditions, Macquarie suggests market concerns with respect to Ansell's potential exposure to current global economic conditions have been addressed.

This is enough for Macquarie to upgrade to an Outperform rating, based on expectations of Ansell's earnings multiple returning to a premium more appropriate for a higher growth defensive company. Such a multiple expansion appears justified to the broker given Ansell's superior earnings growth profile relative to peers. Citi agrees, pointing out there is some upside risk to Ansell's earnings outlook if latex prices maintain current levels through the coming year. 

As a counter argument, BA-ML suggests Ansell's reliance on new products to drive margin and earnings growth in coming years carries some risk. As well, UBS suggests Ansell will need make some further acquisitions to deliver on earnings growth guidance for FY13. 

Both BA-ML and UBS rate Ansell as Hold, while the FNArena database shows a total of two Buy ratings and five Hold recommendations. Bell Potter is not in the FNArena database but also rates Ansell as a Buy.

Price targets for Ansell range from Deutsche Bank at $14.25 to Citi at $16.65, while Bell Potter's target is unchanged at $17.00. The consensus price target of $15.06, up from $14.88 prior to the result, implies limited upside relative to the current share price.

Shares in Ansell today are higher in a weaker overall market and as at 11.50am the stock was up 56c or nearly 4% at $14.80. 

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