article 3 months old

Treasure Chest: Valuation Appeal For Ansell

Treasure Chest | Jul 18 2022

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

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Macquarie upgrades its rating for Ansell to Outperform from Neutral on a favourable outlook.

By Mark Woodruff

Whose Idea Is It?

Analysts at Macquarie

The subject:

Macquarie sees a favourable risk/reward outlook for Ansell ((ANN)) at the current share price and upgrades its rating to Outperform from Neutral.

Apart from potential upside from acquisitions, the broker anticipates several factors will support improved earnings growth from FY24, for the provider of health and safety protection solutions.

These factors include a degree of resilience during periods of slowing growth, particularly for single use and exam solutions (SBUs), explains Macquarie. In addition, there is expected to be progress in relation to strategic initiatives and recent capital investments.

Moreover, the broker’s current forecast (and consensus) already assumes headwinds for near-term earnings growth, as covid-related demand unwinds in the second half of FY22 and FY23.

A solid balance sheet and leverage to a weaker Australian dollar assists Macquarie’s investment thesis, as does valuation appeal. The current 12-month forward consensus EPS multiple is estimated to be at a -29% discount to the ASX200 Industrials index, compared to five- and ten-year discounts of -9% and -6%, respectively.

Valuation was also the reason Ord Minnett upgraded its rating for Ansell to Buy from Accumulate, just over a week ago.

Meanwhile, at the beginning of July, Morgan Stanley noted that while price earnings multiples had generally contracted for the Australian Healthcare sector, they remain above the levels when the Australian 10-year bond yield was last around 4% in 2013.

As a result, the broker looked favourably upon stocks where the growth outlook was better than in 2013, or where EPS certainty was high. For Ansell, it was felt the low multiple at the time provided compensation for any EPS risk involved, and the Overweight rating was maintained.

More info:

In early June, Credit Suisse downgraded its rating for Ansell to Underperform from Neutral and lowered its target price to $24 from $25. In addition to headwinds from a higher SBU cost inventory, higher raw material prices were cited as another reason FY23 earnings would be negatively impacted.

The broker noted raw materials account for around 55% of the company’s cost of goods sold (COGS) and key raw material prices for butadiene, acrylonitrile and cotton had increased year-on-year by 82%, 15% and 65%, respectively, since 2021 lows. The key inputs into nitrile latex include butadiene and acrylonitrile.

At the end of the first half of the financial year, Credit Suisse estimated the largest raw material category was nitrile latex at around 34%, and the combined nitrile and natural rubber raw materials then represented around 40% of the raw material mix.

However, Macquarie now expects easing cost of goods sold should be incrementally positive for the company, and notes prices for nitrile latex have eased from peak levels in recent quarters. The broker increases its target price for Ansell to $27.85 from $27.65.

The FNArena database has six broker ratings with four Buy (or equivalent) ratings, one Hold and one Underperform rating. The average target price of $29.64 set by brokers suggests 21.3% upside to the latest share price.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms