The acquisition of Kimberly-Clark’s Personal Protective Equipment business (renamed as ‘KBU’) has led to a re-rating in Ansell (ASX:ANN) shares over the six months. KBU is the Company’s first major acquisition in over 10 years in terms of the quantum of both price paid and revenue contribution.

With the shares having recently retraced from its highs, we researched Ansell in The Dynamic Investor in mid-March. With the integration of the KBU acquisition progressing well, are there other factors that could support further upside?

About Ansell

Ansell operates two divisions:

• The Healthcare division manufactures and markets surgical and exam gloves for healthcare and industrial applications. Its customer base in the medical vertical includes acute care hospitals, emergency services, alternate care, dentistry and veterinary clinics.
• The Industrial division manufactures and markets hand and upper arm protective solutions for a spread of industrial applications. ANN provides gloves with three specific purposes including mechanical, chemical & liquid, and product protections across several industries.

On 8 April 2024, ANN announced that it has entered into a binding agreement to acquire 100% of Kimberly-Clark’s Personal Protective Equipment business (renamed as ‘KBU’) for US$640m. KBU designs and markets differentiated hand, body and eye protection products under well-known Kimtech and KleenGuard brands.

Key Fundamental Drivers

Kimberly-Clark Integration Tracking Well

The KBU acquisition (completed on 1 July 2024) is performing above plan and its integration is ahead of schedule. Organic EBIT growth of 22.1% (on a constant currency basis) was driven by higher sales and margin expansion. KBU contributed ~2/3rd of ANN’s EBIT growth of $49m.

Further, the Kimberley-Clark acquisition contributed ~200 basis points to the 250 basis points EBIT margin expansion in the recent interim result. ANN now plans to complete integration and exit transitional service arrangements before the end of FY25 and realised some cost synergies in 2H25.

Although KBU reported solid results and is tracking ahead of schedule, it is entering the transition period with increased risk of sales leakage and customer disruptions. This is because ANN is not acquiring the full Kimberly-Clark sales force. Customer disruptions have already been seen in KleenGuard industry safety products (~40% of KBU sales). As such, a key unknown in the degree to which the Company can prevent revenue leakage in Healthcare in FY26 after the joint service agreement with Kimberly-Clark ends.

Negligible Impact from US Tariffs

The Company believes the announced plans to tax US imports of products from China, Mexico and Canada should have negligible impact in 2H25, given:

i. ANN only sells a small percentage of disposable protective clothing it manufacturers in China to the US, including from third party suppliers than the broader industry. Some China production has been moved to Sri Lanka as part of the productivity program;
ii. Has limited exports from Mexico to the US, and
iii. Has taken steps to shift to alternative sources and plans to substantially offset tariff increases through pricing.

Solid Progress on Productivity Program

Ansell’s productivity program is on track to achieve annualised pre-tax savings target of US$50m by the end of FY26, excluding longer-dated IT savings. ANN has achieved total savings over the past 12 months of US$43m.

One concern is that the breadth of the program (organisational streamlining; manufacturing productivity; accelerating the digitisation strategy) increases the likelihood of interruptions. Further, input costs trending up, which may negate some of the savings generated. In addition, employee cost inflation also persists in key manufacturing locations. There has also been an increase in Exam/Single-use outsourced finished goods costs and energy costs (while stable) remain elevated.

Gearing Declining Faster Than Expected

Gearing (on a net debt/EBITDA basis) has declined faster than expected at the time of the KBU acquisition. At the time of the acquisition, ANN expected gearing to fall to below 2.0x within 12 months post completion of the acquisition.

As at 31 December 2024, gearing was 1.6x, down from 1.8x as at 30 June 2024. The balance sheet now has substantial headroom to fund a combination of internal investments, Merger & Acquisition opportunities and capital management.

Fundamental View

While the EPS growth profile is attractive (~12% over FY24-27 on a CAGR basis in US$ terms), this reflects +20% EPS growth expectations in FY26. The latter is likely be reliant on organic growth and ANN’s ability to sustain the targeted cost savings.

In the meantime, several factors preclude a more favourable view. These include: i) Subdued manufacturing end markets demand, ii) Higher raw material costs, iii) Normalisation of Healthcare divisional earnings from the end of destocking, iv) Uncertainty around US tariffs at this juncture and iv) The shares currently trading on a 1-year forward P/E multiple of ~16x, which is around the midpoint of the historical trading band.

Charting View

ANN has been trending higher for the past year. After peaking in February on good volume, it then eased back with the rest of the market and it is now holding near the 100 day Moving Average. This should provide a level of support, so as long as ANN can hold in here, it should be able to continue trending higher again. A fall under $33 would be a negative sign and investors can then be patient for buy levels closer to $30.

 

Michael Gable is managing director of Fairmont Equities.

 

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