Brokers Downgrade As Ansell’s Outlook Weakens

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

-Faltering industrial production
-Better second half expected
-But costs, tax likely to offset
 

By Eva Brocklehurst

Speciality glove and body protection manufacturer, Ansell ((ANN)), has thrown a a spanner in the works, announcing a downgrade to earnings estimates after a weak sales performance in January. Myriad broker downgrades on the stock have ensued.

The announcement signalled to Citi the interim profit will miss the prior corresponding half by around 20%, and the broker's forecasts by 18%. The company's new guidance for FY16 is around 7% below the market's prior estimates.

Ansell expects first half earnings per share of US45-46c and FY16 guidance has been revised to US95-110c from US105-120c. The fault lies with the macro industrial environment, the company maintains. The main changes to Ansell's estimates centre on cuts to the contributions from the medical and industrial divisions.

Ansell is strongly aligned with a global industrial recovery and UBS observes this recovery is not gaining much traction. With the company reporting ongoing order deferrals and inventory reductions, amid uninspiring key indicators such as blue collar employment and purchasing managers indices, UBS cannot envisage any catalyst that would warrant a stronger near-term outlook.

The broker downgrades to Neutral from Buy. One noteworthy item UBS points to is the balance sheet has the capacity for acquisitions. 

Deutsche Bank finds few reasons to own the stock, given the exposure to the challenging outlook, and downgrades to Sell from Hold.

The revisions are just days ahead of the official interim results and imply a firm recovery in the second half, which the broker wants clarified at the results because the weak start to the year sits oddly with such expectations. The December half year fell 13% short of Deutsche Bank's estimates, partly because of a worse FX impact. The revised guidance implies FX benefits in the second half, as cost currencies have fallen relative to the US dollar.

Volatility has struck the stock in Credit Suisse's view, and its rating is downgraded to Underperform from Neutral. FX and industrial volatility – particularly in emerging markets – means visibility is limited, the broker maintains.

Any improvement in earnings is predicated on a recovery in sales growth. To this end, and based on recent results from US industrial product distributors such as Fastenal and Grainger, Credit Suisse suspects the deterioration witnessed in January will continue for the rest of FY16.

The original guidance range for FY16 was obviously not conservative enough to account for the worsening outlook so Morgan Stanley expects the uncertainty will affect earnings growth. The downgrade is not just about weak sales in January but implies orders are being reduced or deferred. Higher costs are also evident in the medical and industrial units and the broker notes the anticipated FX hedging gain in EUR/USD hedges is offset by hedging losses on weakening cost currencies.

Goldman Sachs, not one of the eight brokers monitored daily on the FNArena database, while disappointed with the downgrade, retains a Neutral rating. The broker accepts the results reflect the company's exposure to the global industrial production cycle which has been mixed so far.

Of note, Ansell has leveraged up its balance sheet considerably over the past five years through acquisitions. Goldman Sachs believes this has boosted sales in the industrial/single use and medical segments by 70% and 30% respectively. Hence, this feature has changed the composition of revenue such that historical margins of each division are less predictive of future trends.

Another feature of the soft growth outlook is that the tax rate is likely to increase over the next two years as off-balance sheet losses are exhausted. As a result, Goldman does not expect earnings will show material growth through to FY18.

FNArena's database now shows five Hold and two Sell ratings. The consensus target is $19.49, suggesting 26.8% upside to the last share price. Targets range from $16.75 (Deutsche Bank) to $22.53 (Morgan Stanley).
 

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