Solid organic and brand growth, but profit hit by one-offs
FY17 sales for Ansell Limited (ANN) were in-line with consensus (US$1,600m), showing solid underlying growth (+3.6% in constant currency terms) and strong uptake of core brands (+8%). Despite gross margin expanding 80bp to 37.5% on higher margin products and improved plant efficiencies, higher Selling, General & Administrative Expenses (+13.6%; mainly on one-offs - divesture, portfolio review, long-term/short-term incentives and accruals) saw underlying profit fall short (EBIT US$217.8m, -6%) and net profit follow suit (NPAT US$147.7m, -5%).
While reallocated corporate costs on the recent divestment of Sexual Wellness (SW) and recently announced Transformation program make it difficult to assess divisional performance, underlying net profit improved 4% (ex-costs) and 16% (ex-divestures) in the main industrial division (37% of profit), and was flat in Medical (22% of profit) and Single Use (29% of profit) despite raw material headwinds. Operating Cash Flow (OCF) was maintained (US$146m, flat), mainly on lower capex and interest expense, with cash conversion strong (+100bp to 96%). This supported a 1.1% dividend increase to US$0.44.
FY18 earnings rebased and profit the key focus
FY18 guidance targeting earnings per share between US$0.91 - US$1.01 (+10.22), from a US$0.83 continuing base business (ex-portfolio review costs) appears conservative on the back of the Transformation program and focus on profit drivers. While we don't necessarily agree with the inclusion of all the program's benefits, while excluding FY18 costs (US$30m), we tend to give management the benefit of the doubt and feel more confident in the earnings outlook given:
- an improving global economic backdrop and moderating FX headwinds;
- lower interest costs (4 US cents), Transformation program benefits (3 US cents) and Nitritex acquisition (2 US cents), together equates to 9 US cents;
- 3-5% underlying revenue growth (2H +6%);
- pricing increase offsetting raw material inflation; and
- upside from Sexual Wellness (2-3 months, 1-2 US cents) and ongoing share buyback (US$265m, 3-4 US cents).
We have modestly adjusted our FY18-20 earnings forecasts, lowering revenue and underlying earnings by up to 1.8%. Despite that, the Transformation program is now in train and we see the FY18 earnings guidance as conservative. Given that, we see upwards of 10% Total Shareholder Return, and upgrade our recommendation from Hold to Add.
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