Australia | Aug 23 2024
This story features ANSELL LIMITED. For more info SHARE ANALYSIS: ANN
Ansell’s turnaround story involves many moving parts, including macro headwinds and a post pandemic hangover.
-Is cost management a question of earnings quality?
-FY24 organic growth and cashflow conversion two positives
-FY25 a push/pull melange of factors
By Danielle Ecuyer
FY24 results come up trumps?
Ansell ((ANN)) was one of the walking wounded post pandemic, as demand for its healthcare products tapered with a subsidence in the worst impacts of covid.
This month, the company’s reported FY24 earnings results were embraced with exuberance by the market as green shoots of recovery were evidenced in improving organic revenue growth from the core business units. Industrial sales grew 3.3% including some positive impacts from favourable pricing changes in FY23. Chemical and industrial expanded 2.7% and 4%, respectively.
The Healthcare division revealed improving trends in 2H24 as the “diminished” impacts of de-stocking started to flow through. Sales declined -8% in 2H24 versus the -15% decline in 1H24. The declining slowdown in surgical/examination helped mitigate the overall sales decline, but as management realigned inventories, earnings were impacted -29%.
Underlying, the relatively good news from organic growth and sales turnaround was the exclusion of US$66m in significant items, Morgans comments, which boosted the bottom line FY24 result, coming in above guidance. FY24 EPS also beat consensus estimates and the Morgans analyst’s expectation.
Evans and Partners waives the “quality” of earnings red flag, pointing to the booking of US$66m in costs associated with the productivity program and the acquisition of the Personal Protective Equipment division from Kimberley-Clark, below the line.
Multiple moving parts in FY25
Turning to FY25, analysts observed the wide earnings guidance range which Citi interprets as the number of uncertainties the company is facing.
Citi describes driving factors for FY25 earnings as a “push/pull”.
On one hand freight costs, while subsiding, could remain an issue. Ansell fell victim to the Red Sea closures and re-routing of shipping, which impacted on its surgical shipments to EMEA markets in FY24.
Input costs, having experienced some dis-inflation, seem to be on the rise again, with prices moving higher in recent times for inputs, nitrile latex and natural rubber latex.
Energy costs have stabilised at higher levels.
The Accelerated Productivity Investment Program which lays at the heart of the Ansell turnaround is a mixed bag of costs incurred to generate cost outs.
Management highlighted the program was making “good progress” which includes a -1330 reduction in head count.
Some US$20m in costs will be removed in FY25 at the pre-tax level, Citi asserts. Macquarie forecasts US$45 in pre-tax costs for the acquisition and the productivity program, offset by around an incremental -US$17m in savings from the productivity program.
By FY26 a target of -US$50m in annualised cost savings is anticipated at a total cost of the program at US$85-US$90m. Morgans believes the breadth of the program risks increasing the chance of disruptions to Ansell.
In any event, the magnitude of cost imposts versus savings, makes analysis (let alone forecasting) challenging.
FY25 estimates also include an estimated forex tailwind of US$6m; a one-off contribution benefit on exiting the household glove business in FY24 at around US$5m.
Importantly, margins are expected to improve. Ansell boosted the cash conversion to 131% in FY24 from 80% in FY23, with better working capital from lower inventories.
The company is also lowering capex, Citi highlights, to -US$60-US$70m in FY25 and falling to -US$60m in FY26. A new greenfields surgical plant in India is planned for FY25.
The Kimberley-Clark asset acquisition at a cost of -US$640m is trading in line with expectations, some six weeks in, but the earnings contribution in FY25 is expected to be “modest, almost immaterial” management noted.
This is due to the 12-month transitional services agreement. Scope for customer loss and disruptions remains a risk, Morgans stresses.
Brokers stay broadly on the sideline
The FNArena consensus price target was revised up by $2.82 to $28.708 post the FY24 results. The target is the average of targets set by brokers monitored daily by FNArena.
Macquarie and Citi have the highest target prices at $32 and $32.50, with an Outperform and Neutral rating, respectively.
Morgans joins in with Hold and a $27.10 target. Ord Minnett has upgraded to Hold from Lighten, with a $27.80 target.
Outside the daily monitor, Evans and Partners has a Negative rating with a $25 target price.
The latter analyst sums up the conundrum for investors, Ansell provided an FY24 earnings “beat, but at what cost?”.
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