Morningstar | Ansell Shares Trading Close to Fair Value Following Price Rally Since January. See Updated Analyst Note from 27 Jun 2019
After rallying more than 20% since the beginning of calendar 2019, shares in Ansell are now fairly valued relative to our unchanged AUD 27.00 fair value estimate. We continue to forecast high-single-digit earnings CAGR over the five years to fiscal 2023, with a meaningful proportion coming from margin expansion on the back of increased selling prices, reduced raw materials cost in addition to the cost savings from the transformation program.Ansell enjoys a cost advantage over competitors and we estimate the firm's manufacturing costs to be in the bottom industry quartile, enabling it to sell leading brands at attractive margins. Additionally, the majority of Ansell's products sell at premiums (typically about 10%) to competing products, attesting to the firm’s brand and associated pricing power. These attributes underpin the firm's narrow economic moat, and we expect the firm can continue to out-earn its cost of capital over the next decade.
Ansell's healthcare division remains the main engine, generating over 50% of group revenue, and nearly 60% of group earnings. The firm's healthcare products are less exposed to cyclical factors, relative to other product categories, and therefore offer a reliable revenue stream. We continue to forecast annual mid-single-digit revenue growth over the five years to fiscal 2023.
Ansell bolstered its industrial division with the acquisition of Texas-based provider of specialty gloves, Ringers Gloves, in January 2019. The firm's balance sheet certainly was strong enough to do so. We forecast average net debt/EBITDA of less than 0.3 during the next five years, well below the target leverage ratio of between 1.5 and 2.0. We estimate the firm has capacity for more than USD 1 billion of debt-funded acquisitions without jeopardizing its balance sheet, allowing management to continue growing scale and further strengthening its economic moat.
Ansell, along with its subsidiaries, is engaged in the development, manufacturing and sourcing, distribution and sale of gloves and protective personal equipment in the industrial and medical gloves market, as well as the sexual wellness category worldwide. Co. operates in four main business segments: Medical, which manufactures and markets surgical and examination gloves together with a range of healthcare safety devices; Industrial, which manufactures and markets hand and body protection solutions; Single Use, which provides single use industrial application gloves; and Sexual Wellness, which manufactures, sells and markets a range of branded condoms, lubricants, devices and fragrances.
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