Treasure Chest: Ansell

This story features ANSELL LIMITED, and other companies. For more info SHARE ANALYSIS: ANN

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts.

Whose Idea Is It?

Analysts at Evans and Partners

The subject:

Ansell, manufacturer of surgical and other gloves, as well as protective clothing

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By Rudi Filapek-Vandyck

For the past two decades or so, loyal shareholders in gloves and protective wear manufacturer Ansell ((ANN)) have had a great and rewarding ride with the shares bottoming below $4 during the bear market of 2000-2002 and surging above $40 in 2020 when the world faced its first global pandemic since the Spanish flu, more than 100 years prior.

Things have changed dramatically since, and they are yet to revert to the pre-covid normal, if that is the future trajectory for this circa $3bn company. Post-pandemic market conditions have proved a tough nut to crack for many a prior covid beneficiary, of which many operate inside the global healthcare services industry.

One look today at share prices for Sonic Healthcare ((SHL)), Fisher & Paykel Healthcare ((FPH)), Healius ((HLS, even CSL ((CSL)), shows the uphill trajectory for the healthcare sector generally over the past three years. Some of these share prices have landed back on investors' radar as expectations for a sector revival are building.

Seriously, how long can the headwinds from 2020 continue to weigh on what was previously the best performing sector on the ASX, by a landslide?

While shares in Ansell have equally participated in the Santa Rally that concluded 2023, this week's initiation of coverage by Evans and Partners warns investors the company's operational pain is likely to last longer, casting doubts on whether any sector revival can/should/will also include Ansell.

Evans and Partners has initiated coverage with a Negative view and $23 valuation, which is not far from where the shares are trading. On current market forecasts, depending on FX translation, Ansell shares might offer a 3% yield, with zero franking.

What are the key problems holding the company back?

Ansell might be included in the local healthcare sector but in reality its Industrial operations represent circa 40% of all sales, and 60% of the profits. One of the key reasons as to why healthcare is contributing less than its top line share is because the Surgical and Life Sciences divisions are still confronted with excess inventories throughout their respective supply chains.

The boost during the early days of covid in 2020 has proved a long-lasting operational headwind. Three years down the track, it is clear this problem is sticking around for longer and Ansell, burdened by high-cost inventory and fixed-cost overheads, simply has to toughen it out. While management is taking impact minimising measures, margin pressure remains the proverbial ball-and-chain.

The problem for the other main operation, the aforementioned Industrial division, consists of slower economic growth as a result of central bank tightening and higher bond yields. The logical conclusion to draw here is that demand for Ansell's industrial products is highly unlikely to accelerate in the short term.

Meanwhile, higher input inflation is yet another factor impacting on the company's profitability.

Management has announced yet another cost-out program, but analysts at Evans and Partners cannot get excited about it. Based on Ansell's historical track record, the analysts argue such cost-outs merely absorb the rise in input costs, rather than providing additional growth. This view is reflected in the title of this week's research report: "Running hard to stand still".

Previewing February

Starting off with low expectations, Evans and Partners' forecast of underlying EPS of US$0.37 for H1 to be released in February implies a decline of -27% from twelve months ago, and sits -10% below current market forecast on the broker's own assessment. Surgical revenue is expected to fall by -25% alongside an expected -5% fall for Life Sciences during the half.

Post FY24, the broker does anticipate the return of EPS growth, but looking at market consensus, the analysts simply believe expectations remain too high. Mid-single digit EPS increases should be expected, at best, states the initiation report, not the double digits projected elsewhere.

Part of next financial year's "recovery" consists of better margins for the healthcare division.

Looking at the six expert voices covered daily by FNArena, two things stand out. Most stockbroking analysts are equally hesitant to bank on better times ahead for the company, instead sticking with a Hold/Neutral rating for the time being. But most valuations and price targets are in the mid-$20s, suggesting more upside than Evans and Partners is prepared to contemplate.

Ultimately, whether Ansell shares are ready for a sustained recovery, or instead fully valued, depends on the profit growth that awaits company and shareholders from mid-2024 onwards.

Irrespective of what happens in February, that question might not be answered until August when FY24 financials become public, and prospects for FY25 and beyond come into focus.

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