Ansell: Result 2018

Yesterday, The Australian reported that Ansell had ‘earnings per share of $US1.02 for the 2018 financial year, which just missed Macquarie's US$1.03 forecast.' Surely, what they really mean is ‘Macquarie's forecast missed earnings'. The weather doesn't miss forecasts – blame falls to the weatherman.

Putting the media's irritating habit of blaming companies for 'missing expectations' aside, Ansell announced a decent full-year result. Nonetheless, yesterday's 7% share price decline suggests a few weathermen expected more.  

Underlying earnings per share were flat this year at US$1.02. However, Ansell bought back around 4% of its stock over the past year, which means that earnings would otherwise have fallen around 4–5%. Most of that was due to the sale of the Sexual Wellness division last year so, if we focus on the continuing operations, the picture is a bit prettier: sales rose 5% in constant currency terms to US$1.5bn, while net profit was up 15% at US$147m.

Health & Industry

Revenue for the company's biggest division, Healthcare – which accounts for 52% of sales – was up 5% to US$774m. Excluding acquisitions, it was pleasing to see organic sales up 9% in emerging markets and up 2% in mature markets, which is about the most we can hope for over the long term.  

Underlying earnings before interest and tax (EBIT) grew 6%, so margins widened slightly, but things look worse under the hood: margins would have fallen due to higher raw material costs, but this was offset by a one-off $4m benefit from the reversal of a provision for indirect taxes. 

The price of natural rubber latex peaked in early 2017, but has come down since then. That peak price, however, was still being ‘digested' throughout the year due to the time difference between buying the latex, making the glove, and its eventual sale. While latex prices have moderated, the cost of Ansell's other raw materials has been rising, particularly Nitrile latex. Adding it all together, current spending on raw materials is roughly what it was back at the 2017 peak, so we can expect another year of squeezed margins. 

Revenue for the company's other major division – Industrial, which accounts for 48% of sales – was up 5% to US$715m. Organic growth was strong, up 5% overall and up 12% in emerging markets. 

Ansell's emerging market sales have risen significantly over the past decade and currently stand at 21% of total revenue, up from 18% in 2012. What's more, the company is evenly spread across many markets – not concentrated in China or the other big hitters – which evens out some of the political and currency risks. This geographic breadth is also a competitive advantage as Ansell is one of only two global glove makers able to supply multinational industrial or medical companies that operate in multiple countries (see Ansell: Selling shovels in a gold rush). 

Clean balance sheet

Free cash flow dropped from US$165m to US$108m due to a fall in operating cash flow following the sale of Sexual Wellness, combined with high capital expenditure associated with the company's ongoing cost-cutting program. Capital expenditure is expected to rise from US$45m to US$60–65m next year, including a US$20m investment in its low-cost Vietnam factory. 

Ansell used some of its cash flow – including proceeds from the sale of Sexual Wellness – to reduce debt. The company currently has a net cash positon of US$27m compared to net debt of US$407m in 2017. Ansell also bought back around US$96m worth of its own stock, with board approval to buy a further 9.5 million shares, or roughly 6% of the total. 

Management expects revenue to increase 3–5% in 2019; however, higher raw material costs and a higher tax rate are expected to produce underlying earnings per share of US$1.00–1.12. This would imply 10% growth at the top of that range, but a 2% fall at the bottom. Management also forewarned that rising raw material costs and new US import tariffs could wipe a further 5–6 cents from earnings per share. 

Ansell trades on a price-earnings ratio of around 18 based on 2019 forecasts, or maybe slightly higher if tariffs and raw material prices squeeze margins. We'll leave the price guide unchanged for now. Ansell's economies of scale, dominant market share, and decent (albeit bumpy) long-term growth prospects, mean we're happy to HOLD.

Note: The Intelligent Investor Equity Growth and Equity Income portfolios own shares in Ansell. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.

Disclosure: The author owns shares in Ansell through his interest in the Intelligent Investor Equity Growth and Equity Income Portfolio.