Ansell (ASX:ANN) shares have found some support since we last wrote about it in The Dynamic Investor. Do we think it’s a buy?
Overview of Ansell
Following the divestment of the Sexual Wellness Global Business Unit (GBU) in September 2017, the Company currently has two Global Business Unit (GBU): Healthcare and Industrial.
The Healthcare GBU manufactures and markets surgical and exam gloves for healthcare and industrial applications. Its customer base in the medical services includes acute care hospitals, emergency services, alternate care, dentistry and veterinary clinics. The Healthcare GBU also distributes a range of high performance single-use gloves used in industrial applications, including chemical, food services, life sciences, electronics and automotive aftermarket. Key brands include Gammex, Microflex and TouchNTuff.
The Industrial GBU manufactures and markets high-performance hand and body protection solutions for a wide range of industrial applications. Key brands include AlphaTec, HyFLex and Edge.
Impact of Raw Material Costs on Ansell’s Profitability
ANN’s raw material costs, which account for ~40% of Cost of Goods Sold (COGS), are a key sensitivity for group profit. At the end of FY18, raw material pricing was still higher than levels from two years ago. In particular, nitrile and advanced synthetic latex increases offset the lower natural rubber latex raw material costs. Heading into FY19, raw material pricing continues to be volatile and are again approaching peak levels seen in FY18. The Company also noting increased nitrile/advanced synthetic latex prices heading into FY19.
The significance here is that higher raw material costs should be sustained. If Tariffs introduced on US imports are confirmed at the higher levels proposed, the cost impact could represent downside risk to the EPS guidance range for FY19. This would be US$1.00 to US$1.12 per share, which represents EPS growth of -2% to +10% compared to FY18.
Acquisitions Needed in Light of Organic Growth Challenges
Following the receipt of proceeds from the sale of the Sexual Wellness GBU, the Company now has a net cash position. This provides capacity to pursue further acquisitions. To this end, ANN commented that the pipeline of acquisitions remains robust. Following the divestment of the Sexual Wellness GBU, the Company is targeting at least 1-2 smaller acquisitions per year. It has also commented that it has US$1.0b-$1.4b in capacity for acquisitions. This would take the gearing level to the upper end of the target gearing range of 1.5-2.0x.
We consider that any earnings-accretive acquisitions would be well received by investors. This is given that organic revenue growth slowed in the second half of FY18 and is mostly being generated by a core group of ten ‘Growth Brands’, with none core brands generating negative organic growth.
Fundamental View
We consider that the divergent growth rates in Growth brands/non-core brands, as well as across the two GBUs (Industrial GBU organic sales growth strengthened to 5.7% in 2H18, while Healthcare GBU moderated to 1.7%) and ongoing volatility in raw materials pricing provides a degree of earnings uncertainty.
The current share price appears to be factoring in potential earnings accretion from acquisitions. Whilst this would be clearly welcomed by the market, we are cautious on taking a more favourable investment view. This is on the basis that any acquisitions are imminent, given that asset prices remain elevated.
Technical View
In mid August, we saw ANN break minor trend line support and it now sits at stronger support near $25. The severity of the recent fall means that we can’t be too confident at current support levels. We need further evidence that this support line will hold. Otherwise we are looking at further weakness back towards $22.
Current share prices available here.
You can learn more about technical analysis in this article.
Michael Gable is managing director of Fairmont Equities.
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