Ansell’s Outlook Far From Smooth

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

-Soft organic growth
-BarrierSafe performs well
-FX, weak demand are headwinds
-Capacity for further acquisitions

By Eva Brocklehurst

Brokers are becoming more polarised around glove and condom manufacturer, Ansell ((ANN)). Some believe a return to stronger growth is underway while others caution that aside from acquisitions, this is far from certain.

Recent acquisitions and the company's flagged restructure make year-on-year comparisons in its segments less meaningful. For example, UBS highlights industrial sales grew 2.1% in the first half, but organically this is almost halved to 1.3%. The broker notes gross margins were narrower, despite lower commodity costs. This disparity was attributed to the integration of BarrierSafe and higher outsourced manufacturing costs.

UBS flags a more challenging FY16, as the company will confront a weaker industrial outlook, FX headwinds and no acquisition benefits. Management has attempted to mitigate this outlook somewhat, stating that brand initiatives and expansions will gain traction while efficiencies should come with the manufacturing restructure. UBS sticks with a middle-of-the-road Neutral rating.

Morgans is more buoyant, retaining an Add rating. The broker is confident earnings momentum will continue despite the challenges. Sales growth forecasts are ramped up modestly across all divisions and Morgans expects new product offerings, lower raw material costs and productivity gains will underpin the near-term, while acknowledging that FX and economic conditions add risk to the longer term outlook. Macquarie is in the same boat, noting the single-use division, which primarily includes the BarrierSafe business, was the stand-out performer, benefitting from high exposure to a robust US market. This division more than offset the lacklustre performance in the medical, sexual wellness and industrial divisions.

Macquarie upgrades to Outperform, highlighting the fact that soft organic sales growth is not unique to Ansell. Moreover, the situation should improve if raw material prices stabilise and industrial activity returns to trend. With earnings risk now significantly reduced and the company in line to meet its FY15 guidance, the broker believes the investment proposition is brighter. Morgan Stanley is also more confident that FY15 guidance can now be achieved.

At the other end of the scale is Credit Suisse, who downgraded to Underperform. While the results were ahead of expectations, FX is considered a major headwind in a difficult operating environment. The broker's updated currency assumptions, notably EUR/USD, have resulted in downgrades to earnings forecasts of around 9.0% for FY16 and FY17. Over time, the broker is more optimistic, expecting new products should deliver growth while headwinds from non-core brands will subside as these products continue to be rationalised.

JP Morgan is also unconvinced by the organic growth story, although acknowledges synergies and restructuring benefits imply guidance can be raised. This broker also points out that the integration and synergy benefits arising from the BarrierSafe acquisition camouflaged the fact that top line growth appears to have faded in the wake of discounting, and because of lumpy contracts.

Caution prevails among other brokers downgrading on the back of the results. Citi downgrades to Sell, disappointed at the weak organic growth and patchy end-market conditions. The broker expects demand to remain uncertain. On the plus side, the company is envisaged to have the capacity to undertake further acquisitions and add incremental earnings, although Citi notes management recently signalled a need to focus on extracting synergies before pursuing further M&A.

Deutsche Bank also downgrades, to Hold from Buy, given lacklustre organic growth, which it suspects will become the norm and cause earnings growth to slow. Acquisition strategies are the main upside risk to the broker's forecasts, along with a surprise improvement in organic growth.

 FNArena's database contains three Buy, two Hold and three Sell ratings. The consensus target is $24.61, suggesting 3.1% upside to the last share price. This compares with $22.19 ahead of the results. Targets range from $20.94 to $27.00. Note that the share price did jump 5% on the report release.
 

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