Ansell Ltd (ANN) – Neutral - Analyst Research

ANN’s share price fell by -7.2% after the Company reported FY18 net income of $484.3m which missed estimates of $490.7m and net income from continuing operations of $138.8m, which was well below market expectations of $147m. However full year revenue of $1.55bn came in above estimates of $1.50bn.

COMPANY DATA

Date of Report	ASX	Price	Price Target	Analyst Recommendation
22/08/18	ANN	A$26.10	A$26.75	NEUTRAL

Date of Report

22/08/18

ASX

ANN

Price

A$26.10

Price Target

A$26.75

Analyst Recommendation

NEUTRAL

Sector : Healthcare	52-Week Range: A$21.13 – 29.64
Industry: Healthcare Supplies	Market Cap: A$3,614.6m

Source: Bloomberg

Company Description

INVESTMENT SUMMARY

We rate ANN as a Neutral for the following reasons:

ANN is a quality business with global manufacturing capabilities.
Organic growth drivers are potentially positive for earnings.
FX translation should be positive for the Company.
Rubber input costs such as rising oil prices will be a negative impact for ANN’s raw material derivatives.
ANN has a strong balance sheet position with flexibility to return cash to shareholders or borrowing capacity for acquisitions

We see the following key risks to our investment thesis:

Product recall.
Increase in competitive pressures.
Adverse movements in AUD/USD.
Emerging or developed market growth disappoints.
Any worst or better prices for raw materials.

Figure 1: : ANN EBIT by Segment

Source: Company

ANALYST’S NOTE

Divestment of SW division was reflected in the accounts of the Company. Interestingly, despite cost headwinds in raw commodities, sales were up +8.4% on pcp and EPS up +19.1% to 96.5 cps. Higher raw material costs did see group EBIT fall by -11.2%, however this drag appears temporary, as margins improved significantly in 2H18.

We note though, that if increasing raw material costs are sustained and U.S. import tariffs implemented at higher proposed levels, the cost impact, before mitigation, could represent a 5-6cps downside to midpoint of FY19 EPS guidance range. ANN trades on 16.9x PE20, ~2.7% dividend yield – Neutral.

FY18 results-strong performance by continuing operations. On a continuing basis

1. Sales were up +8.4% (+5.1% on constant currency) on pcp, owing to +4.0% organic growth.

2. EBIT declined -11.2% (-13.7% on constant currency) to $158m, impacted by higher raw materials cost.

3. Profit gained +16.2% (+9.2% on constant currency), attributable to lower interest expense and lower U.S. tax rate.

4. EPS rose +19.1% (+11.9% on constant currency) to 96.5 cps (versus 81 cps in FY17), impacted by the share buy-back program, with 5.2m shares repurchased in FY18.

5. Management declared a final dividend of US25cps (unfranked), taking the FY18 dividend to US45.5cps.

6. Strong liquidity with net cash position of $28m, following divestment of Sexual Wellness division. However, the divestment lead to a fall in operating cash flows from $146m to $93.6m, primarily due to loss of operations from SW segment.

FY19 outlook. Management noted, “external market conditions in FY19 are expected to generally remain supportive to top line growth. We are targeting continued organic revenue growth in the 3-5% range, and expect transformation cost benefits, pricing and product mix actions to benefit EBIT growth.” EPS is expected to be in the range of $1-1.12, negatively impacted by higher effective tax rate (impact of 3-5c). Management remains uncertain about the impact of the potential introduction of new tariffs on imports from the U.S. to China but noted that the cost impact of higher tariffs could represent a 5-6c downside to midpoint of EPS range. Transformation P&L cash costs of $20-23m are expected in FY19 (excluded from EPS guidance provided) and an additional non-cash fixed asset write down of $20-30m is anticipated. Management remains positive that continued success in ANN’s capital deployment strategy through acquisitions and share buybacks would help offset any temporary unfavourable impact from sustained higher RM costs or higher tariffs.
Healthcare GBU (52% of revenue; 58% of EBIT) – solid results despite low surgical growth. The segment delivered organic revenue growth (excluding acquisition benefits) of +3% led by +8.6% growth in sales to emerging markets. Overall sales were up +5.2% (constant currency) which included the benefit from Nitritex acquisition in 2H17 and gammaSUPPLIES acquisition in 1H18. Surgical and safety solutions growth moderated to +1% compared to FY17, which included the temporary benefit of distributors restoring normal safety stock levels. Adjusted EBIT (constant currency) was up +5.6% on pcp, with improved 2H margins overcoming the first half impact of higher raw material costs. FY18 EBIT also benefited from a $4m reversal of accrued prior period indirect taxes. On a reported basis, sales and adjusted EBIT were up +7.8% and +9.1%, respectively.
Industrial GBU (48% of revenue; 42% of EBIT). Sales increased +5.0% (constant currency) with organic growth of +5.2%. Mechanical grew +6.4% following strong growth of gloves and sleeves. Chemical sales grew by +1.4%, despite facing a drag following significant destocking at one major customer. Adjusted EBIT (constant currency) grew +4.3% on pcp but EBIT margins declined slightly, impacted by higher raw material costs in 1H18.

Got a question?

FY18 RESULTS SUMMARY…

Figure 2: ANN Results Summary

Source: Company: CC = Constant Currency

Figure 3: Non-Recurring items recorded in FY18

Source: Company

BY SEGMENTS…

Figure 4: Results – by segments

Source: Company: CC = Constant Currency

Figure 5: Peer group comparables – consensus

Source: Bloomberg

Figure 6: ANN Financial Summary

Source: BTIG, Company, Bloomberg

COMPANY DESCRIPTION

Ansell Ltd (ANN) operates two global business units: (1) Ansell’s Industrial segment manufactures and markets multi-use protection solutions specific for hand, foot, and body protection, for a wide-range of industries such as automotive, chemical, metal fabrication; (2) Ansell’s Healthcare segment (Medical + Single Use) offers a full range of surgical and examination gloves covering all applications, as well as healthcare safety devices and active infection protection products. The segment also manufactures and markets single use hand protection. Ansell recently sold its Sexual Wellness Global Business Unit group.

Recommendation Rating Guide

Recommendation Rating Guide	Total Return Expectations on a 12-mth view
Speculative Buy	Greater than +30%
Buy	Greater than +10%
Neutral	Greater than 0%
Sell	Less than -10%

Reach Markets Disclaimer

Reach Markets Pty Ltd (ABN 36 145 312 232) is a Corporate Authorised Representative of Reach Financial Group Pty Ltd (ABN 17 090 611 680) who holds Australian Financial Services Licence (AFSL) 333297. Please refer to our Financial Services Guide or you can request for a copy to be sent to you, by emailing [email protected].

Read our full disclaimer here >

This publication contains general securities advice. In preparing the advice, Reach Markets Australia has not taken into account the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision on the basis of this advice, you need to consider, with or without the assistance of a securities adviser, whether the advice in this publication is appropriate in light of your particular investment needs, objectives and financial situation. Reach Markets Australia and its associates within the meaning of the Corporations Act may hold securities in the companies referred to in this publication. Reach Markets Australia does, and seeks to do, business with companies that are the subject of its research reports. Reach Markets Australia believes that the advice and information herein is accurate and reliable, but no warranties of accuracy, reliability or completeness are given (except insofar as liability under any statute cannot be excluded). No responsibility for any errors or omissions or any negligence is accepted by Reach Markets Australia or any of its directors, employees or agents. This publication must not be distributed to retail investors outside of Australia.

It is recommended that you seek independent advice and read the relevant Product Disclosure Statement before making a decision in relation to any investment. Any advice contained in this communication is general and has not taken into account the investment objectives, financial situation and particular needs of any particular person.

Banyan Tree Disclaimer

This document is provided by Banyan Tree Investment Group (ACN 611 390 615; AFSL 486279) (“Banyan Tree”).

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy, or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and Banyan Tree is not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Banyan Tree does, and seeks to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Banyan Tree, its associates, officers, directors, employees and agents. Except for any liability which cannot be excluded, Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Banyan Tree is not liable to recipients in any matters whatsoever otherwise recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Banyan Tree does not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Banyan Tree.

This document has been commissioned by Reach Markets Australia Pty Ltd and provided by Banyan Tree Investment Group (ACN 611 390 615; AFSL 486279) (“Banyan Tree”).

Reach Markets

Ansell Ltd (ANN) – Neutral