Ansell: bad news, good news

Ansell has had a rough start to the year, but there's still plenty to like about the company – and the share price.

In Ansell: Interim result 2015 from 10 Feb 15 (Sell – $24.06), we noted the challenging macro environment facing the glove and condom maker in the year ahead. Ultimately, we said, ‘as many of Ansell’s customers have learnt, hope is not a strategy – you need protection ... until a margin of safety returns, we’re downgrading to SELL'.

The margin of safety has arrived. The stock fell 20% following a profit downgrade and the share price is now down 36% since that review. Before we jump on board, though, let’s take a look at the bad news.

Management has reduced its guidance for 2016 earnings per share by about 9% from US$1.05–1.20 to US$0.95–1.10.

Key Points

  • Worse than expected start to 2016

  • Major brands performing well

  • PER of 11, decent FCF; Buy

Management said trading conditions improved in the 3 months to December following October’s general meeting; however, January sales were significantly lower than expected ‘as customers deferred or reduced orders to adjust inventory levels amid a general weakening in the external economic environment. In addition, continued currency and economic volatility presents challenges to forecast visibility, particularly in emerging markets’.

A depreciating euro relative to the US dollar didn’t help either, making exports to the region less competitive.

We’ll know more details when the interim result is released on Monday, but the company pre-announced the headline numbers: revenue is expected to be flat after removing the effect of currency fluctuations at US$785m, with earnings per share expected to be down 20% to US$0.45–0.46 (down 10% on a constant currency basis). Free cash flow, however, is expected to be in line with the previous corresponding period.

On a positive note, management said the Sexual Wellness division and major brands in Industrial and Single Use performed strongly with good growth in earnings before interest and tax for the Single Use division.

Management also expects performance to improve in the second half of the financial year, thanks to a new distribution strategy, price increases in Europe, the Middle East and Africa, and lower raw material prices.

Upgrade

Ansell is highly exposed to volatile commodity prices, currency fluctuations and cyclical industrial demand so you can’t put too much weight on any one result. Still, we're lowering our price guide by about 8% to $16.50 to account for the poorer than expected outlook.

Notwithstanding lacklustre organic growth in recent years, there’s still a lot to like about Ansell. The company owns a collection of well-recognised brands, has a large and entrenched distribution network and, being the number one or two player in all its core markets, has significant economies of scale. The company’s net debt of US$463m is a turn-off, but with operating earnings covering interest payments 10 times over, it’s manageable.

In August, the board approved a US$100m share buy-back, with US$64m still unused as of the last notice. At today’s share price, and given the lack of reinvestment opportunities, we think this is sound capital management and will contribute to higher earnings per share growth.

Ansell’s share price has fallen 29% since A fresh look at Ansell from 24 Nov 15 (Hold – 21.70), putting the stock on a forward price-earnings ratio of 11 using the mid-point of management’s revised earnings guidance and a USD exchange rate of 0.71. The stock has a free cash flow yield of 6.7% and unfranked dividend yield of 3.7%.

That’s a fair price for a good company and we’re upgrading to BUY.

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