Ansell: Interim result 2013
Recommendation
Despite revenue growing 6% to $648.1m, Ansell’s net profit contracted 14% to $57.1m for the half-year ended 31 December. Earnings per share came to 42 cents, from which a 16 cent dividend was declared (unfranked, ex date 21 February). Management also announced a new 2m-3m share buyback.
Temporary problems
Leading the decline was the company’s industrial division, which saw revenue grow 9% to $265.4m but divisional earnings before interest and tax (EBIT) fall 4% to $38.1m. European car manufacturers have wound back production, and fewer shifts means lower demand for safety gloves. This particularly hurt the contribution from recent acquisition Comasec, which performed far below expectations. These problems are temporary and we expect improved performance if (when?) European conditions improve and Ansell better integrates recent acquisitions.
H1 2013 | H1 2012 | Change (%) | |
---|---|---|---|
Rev ($m) | 624.2 | 594.1 | 5 |
EBIT ($m) | 66.2 | 72.7 | -9 |
EPS (cents) | 42.0 | 49.3 | -15 |
DPS (cents) | 16.0 | 15.0 | 7 |
Gearing* (%) | 27.0^ | 13.5 | 13.5 |
Divisional EBIT ($m) | |||
Industrial | 38.1 | 39.7 | -4 |
Medical | 17.2 | 16.3 | 6 |
Sexual wellness | 14.5 | 18.8 | -23 |
Speciality | 2.6 | 4.6 | -43 |
* Net debt to net assets, ^Adjusted for Hercules acquisiton |
This contrasts Ansell’s medical business where divisional revenue fell 4% but EBIT rose 6% to $17.2m, thanks to strong sales growth in its non-latex gloves and surgical safety products. Non-latex products now make up 61% of Ansell’s business, up from 58% in 2010. The continuing trend away from latex-based products makes future earnings less dependent on the volatile latex price.
The sexual wellness division – which makes condoms, lubricants and related products – returned a surprisingly poor result for the half. Revenue increased 5% to $114.8m as the company's SKYN-branded condoms continued to win market share. Marketing costs though more than offset the growth. This, combined with falling contract condom revenue and a shift to a new US packing facility, saw divisional EBIT fall 23% to $14.5m.
It was a similar situation at the company’s speciality products division, which boosted revenue 19% (5% excluding the Comasec acquisition) to $102.6m but lower demand from the food services industry and delayed contracts from the US and Australian militaries reduced the sale of higher margin products. Divisional EBIT collapsed 46% to $2.5m. Again, these are temporary problems.
Bold predictions
Despite a disappointing result we remain impressed with management’s consistent, frank and transparent presentation of its results. Others should take note.
Still, we were less impressed with its bold persistence with maintaining full-year guidance of earnings per share growth of 8-10%. If achieved this would be a mighty effort. And chief executive Magnus Nicolin hinted at deferring capital spending or reducing marketing to hit that target. This would be a poor strategic decision, and it shows why we’d prefer companies not to provide guidance.
Mr Market wasn’t too happy with Ansell’s poor result either, with its share price falling 9% on the news. As we argued in Ansell: The glove fits from 17 Sep 12 (Hold – $15.55), this is a business we’d happily buy at the right price, and we remain hopeful that these temporary problems will present a buying opportunity. Still, the share price has increased 3% since 18 Dec 12 (Hold – $15.49) and it's a tad too expensive to upgrade. HOLD.