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Morningstar | Ansell Meets Expectations as Transformation Continues

Narrow-moat Ansell delivered full-year results in line with expectations after adjusting for the divestment of its sexual wellness business. Net profit after tax of USD 146.7 million on group revenue of USD 1,489 million, up around 23% and 8%, respectively, year on year and on a continuing business basis, tracked our forecast of USD 150 million and USD 1,483 million. A full-year dividend of USD 0.455 was declared. We maintain our long-term forecasts and raise our fair value estimate by 4% to AUD 27 per share from AUD 26, after adjusting for an Australian dollar/U.S. dollar exchange rate of 0.73. At current levels, we consider shares in Ansell fairly valued.

Looking beyond the many moving parts and adjustments resulting from its ongoing transformational program, growth in its two major global business units of healthcare and industrial was in line with forecasts, with organic growth of about 4% in constant-currency terms, in the middle of management’s targeted 3%-5% range. However, selling, general, and administrative expenses as a percentage of group revenue, a key area of focus for the company given streamlining efforts, ended the year higher than we expected despite USD 7 million of transformational benefit. We remain positive on Ansell’s strategic rationale of streamlining operations consolidating distribution channels, rather than catering to retail end customers under its transformation program unveiled in July 2017, and we see the divestment of its sexual wellness business as a move in the right direction. Still, we think the targeted savings in the key operating metric of SG&A may take longer to realise than we first assumed. We now forecast SG&A will rise to 24% of revenue in fiscal 2019, compared with previous forecasts of 22.8%, though we still expect the company to hit our projection by fiscal 2023. Management guided to fiscal 2019 EPS of USD 1.00-USD 1.12. Our updated forecast is at the low end of this range.

We also think the mix shift towards more synthetic alternatives will benefit gross margins, with the metric averaging around 40% over the next five years. Gross margins in fiscal 2018 declined by 90 basis points to around 39.1% due to higher raw material costs, representing 38% of cost of goods and largely driven by higher Nitrile Latex and fibres in the period, representing around 29% of the mix. This was despite offsets from lower natural rubber raw material costs. Although raw materials remain a source of uncertainty, we think the increasing use of advanced synthetics and the divestment of the sexual wellness business should help to stabilise this expense.

From a balance sheet perspective, Ansell is in reasonable shape, with net debt of negative USD 31 million lowered by the USD 568 million divestment of the sexual wellness business. According to management, capacity remains for USD 1 billion-USD 1.4 billion in debt, used to fund acquisitions with a targeted range of net debt/EBITDA of 1.5-2 times. As such, and although targets are not readily visible at this stage, we remain comfortable with management’s flagging of at least two moderate-size acquisitions in the life sciences space of around USD 50 million-USD 100 million. Allowing for an additional USD 200 million in debt-funded acquisitions raises our net debt/EBITDA ratio to positive 0.49 times in fiscal 2019, compared with a forecast negative 0.29 times in fiscal 2019 currently and negative 0.16 times in fiscal 2018. As such, we also remain comfortable with Ansell’s ability to fund dividends equal to a payout ratio of 44.5%.