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Morningstar | Ansell Expands Further into Industrial Hand Protection with Acquisition of Ringers Gloves. See Updated Analyst Note from 31 Jan 2019

Narrow-moat-rated Ansell acquired Ringers Gloves, a Houston Texas-based leading provider of specialty gloves in the oil, gas, and general industries. The firm generates USD 34 million per year in sales and serves a global customer base. While a relatively tiny business, from a strategic standpoint we believe the acquisition makes sense. It ties in well with the firm’s growth strategy of expanding its leading position across the full range of industrial hand protection. The transaction will create a leading position in the growing impact protection market, and the firm should be able to extract revenue synergies by leveraging its global sales reach. The acquisition should further strengthen the firm’s competitive advantage, and its narrow economic moat which is hinged on its portfolio of strong brands and low-cost manufacturing.

We estimate the USD 70 million purchase price implies a multiple of around 9 times EBITDA, which is marginally below the 10 times EBITDA the firm currently trades at. While the transaction is expected to be earnings-accretive from fiscal 2020 onwards, the impact on our fair value estimate is negligible. As such we retain our AUD 27.00 per share fair value estimate. We continue to believe the shares are undervalued at the current price, and we see ongoing transformation benefits as a key catalyst for share price rerating.

Management estimated the acquisition, including all transaction costs and integration expenses, to be around USD 1 cent dilutive to EPS in fiscal 2019 and USD 1 cent accretive in fiscal 2020. We have lifted our earnings estimates, albeit very slightly and we continue to forecast high-single-digit EPS growth on average during the next five years, mainly reflecting margin improvement from ongoing transformation cost benefits, pricing, and favourable product mix shift. We expect the company to generate organic revenue growth of around 4% per year on average, within management’s targeted 3%-5% targeted range.

We expect the firm to continue utilising its strong balance sheet to consolidate the protective glove and clothing markets for the foreseeable future. The firm’s target leverage ratio (net debt/EBITDA) is between 1.5 and 2.0 times, and with the current net cash position we estimate capacity for around USD 1.0 billion-USD 1.4 billion in debt-funded acquisitions without jeopardising the balance sheet health. This would result in greater scale, which in turn, is likely to generate manufacturing, marketing, and other cost efficiencies.