Ansell ((ANN)) is rationalising manufacturing facilities as part of its transformation program but raw materials remain the key risk to earnings. The company has ascertained that three of its manufacturing facilities will not be able to meet minimum global performance benchmarks.
Two manufacturing facilities in Mexico and one in South Korea have been closed as Ansell embarks on an efficiency drive across its manufacturing base. This should yield more than US$20m in annual savings. Management will now invest significantly in facilities in Vietnam, Sri Lanka and Malaysia.
The company is observed to be on track to deliver its promised US$30m in P&L savings by FY20. UBS also points out the decision by the US government to hold tariffs at 10% during a 90-day renegotiation period with China de-risks the company’s guidance for FY19 earnings.
European manufacturing activity is moderating, with the company noting weaker automotive production demand in Europe, the Middle East and Africa towards the end of the first quarter. In contrast, US activity remains robust. UBS now factors in around 4% organic growth through the industrial division.
Raw Materials
Butadiene (nitrile latex) prices have been easing since September, while natural latex prices were -23% lower in the first half and are down -17% in the second half to date, versus comparable periods. Butadiene prices remain elevated nonetheless, and were up 41% in the first half. In aggregate, latex inputs represent 36% of raw material expenditure, or 21% of the company’s costs.
Raw material costs, if on a declining trend, as well as the hiatus in US import tariffs, are key factors that could mitigate any downside to guidance, Morgan Stanley assesses.
At the AGM in October the company stated that if higher raw material costs are sustained along with further increases in import tariffs, earnings per share could be in the lower end of the forecast range. EPS guidance for FY19 is US100-112c.
Raw material prices are not under the company’s control and difficult to hedge. Ansell has implemented price increases for a number of products and expects margins to recover in the second half. Still, Citi suspects that, despite the company raising prices, there is an increased risk this will not be sufficient to offset the rising costs.
Re-gearing
Citi believes the market is undervaluing the potential to re-gear. The company is one of the few ASX 100 companies with an ungeared balance sheet, occurring subsequent to the sale of the company’s sexual wellness business in 2017.
At the AGM, shareholders approved buyback program of up to 20% of shares outstanding. UBS believes the company’s transformation programs and buyback will drive around 12% EPS growth. Ansell also intends to focus on acquisitions, noting at its results in August that opportunities were numerous. Citi continues to believe acquisitions are probable over the next 24 months.
The company has previously indicated acquisitions in the US$50-100m range in glove and personal protective equipment are more likely than one large transaction. Citi calculates capacity exists to make transactions worth US$1-14bn. Citi explicitly incorporates acquisitions worth around US$600m into forecasts.
Credit Suisse considers the risks balanced, with the share price supported by the buyback, a net cash position and potential for M&A. FNArena’s database has two Buy ratings and six Hold. The consensus target is $26.13, signalling 15.9% upside to the last share price.
