EUR 850.00 For Business Accounts Only

Morningstar | Transferring Coverage of Narrow-Moat-Rated Ansell; AUD 27.00 FVE Unchanged

We reiterate our AUD 27.00 per share fair value estimate for Ansell as we transition coverage to a new analyst. Our narrow economic moat and medium fair value uncertainty rating are unchanged. Shares in Ansell currently trade at a modest discount to our fair value estimate.

We still project fiscal 2019 EPS of USD 1.00, at the lower end of management's guidance range. During the next five years, we forecast EPS to grow at a high-single-digit pace on average, although a meaningful portion of this will come in the form of margin expansion. We forecast the group EBITDA margin to increase by 3 percentage points to 18% by fiscal 2023, mainly reflecting ongoing transformation cost benefits, pricing, and favourable product mix shift. We expect the company to generate organic revenue growth of around 3.5% per year on average, within management’s targeted 3%-5% targeted range.

We remain positive on the company’s ongoing major transformation program, which is targeting USD 30 million in annual savings by fiscal 2020, across selling, general, and administrative, or SG&A, along with manufacturing and supply-chain efficiencies. The key initiatives include streamlining operations and consolidating distribution channels, rather than separately catering to retail end customers. However, we believe the targeted cost savings may take longer than expected to realise. We forecast SG&A to fall towards 23% of sales by fiscal 2023 (down from an estimated 24% in fiscal 2019), reflecting the benefits of the transformation program.

We still believe Ansell benefits from a narrow economic moat rating. The company boasts a portfolio of market-leading brands, along with low-cost manufacturing, both of which underpin its sustainable competitive advantage. The ongoing innovation program ensures an up-to-date product portfolio and supports the firm's brand equity. Several of the company’s brands have existed for decades and generally command an approximate 10% premium over rival products. The firm’s bottom-quartile manufacturing costs enable it to generate superior margins to competitors.

With the current net cash position, the balance sheet boasts substantial flexibility, and the company has already flagged that it is likely to pursue one or two small acquisitions per year and is also evaluating larger ones. The target leverage ratio (net debt/EBITDA) is between 1.5 and 2.0 times, which provides capacity for around USD 1.0 billion-USD 1.4 billion in debt-funded acquisitions without jeopardising the balance sheet health. The company is also likely to pursue share buybacks if potential acquisition targets fail to meet management's investment hurdles.