Ansell On An Improving Trend

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Ansell beat low expectations in its FY16 results and its outlook for FY17 has re-ignited confidence, demonstrating some positive growth trends.

-Reviewing options for sexual wellness business and M&A opportunities
-Emerging markets stabilising and medical expected to return to growth
-Portfolio optimisation provides capital management potential

By Eva Brocklehurst

Ansell ((ANN)) beat low broker expectations for FY16, with the issues that drove a downgrade back in February appearing transient and largely attributable to manufacturing problems at the Malaysian facilities that are now fixed.

Guidance has built broker confidence in the FY17 outlook, with indications conditions are improving in the US and Europe and emerging markets are stabilising. That said, brokers note organic sales continued to contract, although management expects a return to modest growth as the impact from the offloading of legacy products diminishes.

The company has hired an investment bank to review the options on the sexual wellness business as well as opportunities to enhance its position in the industrial and medical spheres. The sexual wellness division was the best performer in FY16, with sales growth of 8.2%. The single-use division grew strongly at the earnings line but sales growth was non existent because of the passing on of raw material price increases and the exit of non-core product lines.

Macquarie observes organic sales declined for the third straight half but notes management is aiming to deliver organic growth of 2-4% in FY17, supported by a stabilising of emerging market exposures and a return to growth in the medical division, which was the weakest performer in FY16. Sales in Russia were affected by the falling oil price and currency while Brazil was also weak from macro economic issues in FY16. Excluding the two, emerging market growth was 7.7%.

While the outlook may be improving the broker believes, with the stock rallying around 18% after the results and significant uncertainty still surrounding the operating environment, much of the upside is now captured in the price. Macquarie's rating is downgraded to Neutral from Outperform.

The broker expects a sale of the sexual wellness business could free up capital for some larger acquisitions or capital management in FY17, while noting that M&A opportunities have improved globally. Given the company has historically relied on acquisitions to drive growth, this is considered positive news. Meanwhile, global manufacturing activity is seen improving and considered important given around 50% of earnings are derived from the sale of protective equipment.

The sale of the sexual wellness division makes strategic sense to Ord Minnett, if a premium price can be achieved. Management has indicated a preference for further acquisitions versus returning funds to shareholders. The broker’s analysis indicates that Ansell, ex sexual wellness, is trading near fair value after the recent move up in the share price. Ord Minnett suggests FY17 guidance, which implies earnings growth of 2-17% and sales growth of 2-4%, is wide ranging to reflect the board’s cautious outlook.

Credit Suisse maintains the upper end of the guidance range is realistic and suspects the potential divestment of the sexual wellness division would be well received, assuming, too, that a favourable sales price is achieved, and that the capital is invested in accretive acquisitions.

The broker also notes management’s comment that the company’s end customers are largely business and not consumers and, thus, a review of the sexual wellness division makes sense. That said, given the division generates the highest returns of Ansell’s four operating divisions a divestment would only be logical at the appropriate price, the broker warns.

UBS calculates the divestment, at an enterprise value to earnings ratio of 17 could add around $1.60 per share to the target price. The broker ‘s outlook suggests a stronger US market recovery than guidance implies and that Ansell is on the cusp of improvement, having moved through a 12-18 month period of headwinds for currency and operations. UBS envisages upside risk to FY17 guidance and retains a Buy rating.

The worst is behind the company, Morgan Stanley agrees, although recent competitor and distributor results signal operating conditions remain challenging. With FY17 guidance now to hand the broker suspects the stock could re-rate, as the results provide confidence on execution and demonstrate some positive growth trends. In addition there is now potential for portfolio optimisation and this could lead to further capital management.

Citi remains the more pessimistic broker on FNArena’s database, believing the outlook for the industrial business is weak, based on feedback from key customers, and this represents downside risk for the stock.

Morgans believes growth needs to come from areas other than acquisitions. The broker highlights the growth via acquisition strategy is compromised by the need to constantly rationalise overlapping products, and weighs on the company’s ability to drive organic growth across the entire portfolio. Hence, any sign this trend is slowing is to be welcomed. Furthermore, upside requires execution across a number of fronts in the face of continuing weak conditions.

The database has two Buy ratings, five Hold and one Sell (Citi) for Ansell. The consensus target is $21.66, suggesting 3.0% downside to the last share price. This compares with $19.27 ahead of the report. Targets range from $16.50 (Deutsche Bank, yet to update on the results) to $24.50 (Ord Minnett, UBS).
 

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