Treasure Chest: Ansell

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. Today’s idea is on Healthcare Equipment & Services company Ansell.

Whose Idea Is It?

RBC Capital Markets

The subject:

RBC Capital initiates coverage of Ansell ((ANN)) with an Outperform rating

More info:

Ansell is one of the largest manufacturers of personal protection equipment (PPE) in the world. Since the start of covid, there has been, understandably, significant volatility in the global PPE market.

We recall that when scientists initially declared covid to be surface-borne, there was a huge global surge in the production of hand sanitiser. Many a company switched production capacity to join in the sanitiser boom.

Actually no, the scientists soon said covid is airborne. Thus there was a commensurate surge in demand for PPE from masks for the general populace to more extensive protection for healthcare workers. Indeed, there was an early shortfall in global supply leading to desperation in demand.

Then covid ended, sort of. Whether or not covid has gone away, in the wake of the pandemic the world has seen an oversupply of PPE, resulting in destocking and price reductions.

From late 2019, pre-covid, to a peak in 2021, Ansell’s share price rose over 50%. It then fell right back down again into 2022. Having bottomed in late 2023, the share price has been on the rise once more.

In August this year, Ansell posted an FY24 earnings result ahead of consensus forecasts. Most importantly for Ord Minnett at the time, the company posted a strong rise in organic growth in the June half after a protracted period of struggle, which had triggered a downgrade of the broker’s rating, suggesting destocking in gloves and life sciences was complete.

Ord Minnett subsequently upgraded back to Hold from Lighten.

Morgans found the FY24 results mixed, but noted industrial sales and margins both improved on manufacturing efficiencies and carryover pricing that offset declining sales and contracting margins in healthcare as well as industry destocking.

Note that Ansell’s PPE range extends well beyond healthcare into a range of industries requiring some form of employee protection equipment.

While Ansell’s momentum across key divisions in FY24 was encouraging, Morgans cited numerous uncertainties make forecasting challenging and retained a Hold rating.

Citi pointed out the wide range in FY25 earnings guidance was indicative of the uncertainty being faced at the macro level amid Ansell’s integration of its Kimberly-Clark (KBU) acquisition. Citi thus retained Neutral.

Among brokers monitored daily by FNArena, only Macquarie had a positive (Outperform) rating, noting the second half of FY24 proved to be considerably stronger, featuring better healthcare revenues following destocking. The company’s productivity program also served up significant savings.

There has recently been little news out of Ansell, and nor have the above brokers found any cause to update their views. Their consensus target still sits at $29.85, with the stock currently trading above that level.

RBC Capital Markets has nonetheless this week initiated coverage of Ansell with an Outperform rating and $38.00 target. RBC believes post-covid negative trends are over.

The destocking cycle is over, declares RBC, and Ansell can report positive organic revenue growth (constant currency) in FY25 and beyond, with the Life Sciences/Cleanroom division having already reported positive double-digit revenue growth in the second half of FY24.

The broker expects Ansell’s healthcare global business unit margins to start to recover in FY25 as the destocking cycle is now finished and as price cuts subside, and expects margins will return to pre-covid levels.

The company’s group margins will be supported by ongoing benefits from management’s Transformation Program (cost reductions, manufacturing efficiencies, product portfolio rationalisation) and contribution from the higher-margin KBU business.

Ansell is a highly cashflow-generative company, RBC points out, enjoying strong cash conversion and low capex requirements. The broker sees Ansell’s leverage falling from 1.5x in FY25 to 1.1x in FY26 and thus expects the company to be in a strong capital position to either undertake further acquisitions or return capital to shareholders.

In RBC’s view, the fragmented markets in which Ansell operates offers many opportunities for bolt-on acquisitions.

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

Click to view our Glossary of Financial Terms