Ansell (ANN): 1H exceptional

About the author:

Dr Derek Jellinek
Author name:
By Dr Derek Jellinek
Job title:
Senior Analyst
Date posted:
17 February 2021, 11:20 AM
Sectors Covered:
Healthcare

Key points

  • 1H was pre-released so devoid of major surprises, with record organic sales and underlying earnings growth driven via unprecedented demand for safety products due to the SARS-CoV-2 pandemic.
  • All key divisions saw performance improve, with Healthcare verticals benefiting from COVID-19 related volumes, strong price/mix and account wins, and with Industrial segments taking market share despite facing industry headwinds.
  • While upgraded FY21 earnings point to slowing second-half momentum, we believe demand for personal protection solutions will remain robust and ANN best positioned.
  • We increase our FY21-22 estimates, with our price target increasing (clients login to view), and move to Add.

The detail

Record sales and earnings; expanding margins; OCF down; div up

1HFY21 results were of little surprise, given they were pre-released last month, calling out "record" sales and earnings growth across all strategic business units, targeting organic growth of 20%+ (it came in at 22.9%; with revenue of US$938m, +24.5%) and EPS between US$0.81-0.84 (+62-68%; it came in at US$0.83, +65.5%).

Despite higher COVID-19 related costs, GM increased 180bp to 35.9%, on higher production volumes, manufacturing efficiencies and sales growth (both price and volume), with SG&A expenses tightly controlled, resulting in underlying EBIT gains (A$147.4m, +64.3% in cc) and strong margin accretion (+350bp to 15.7%).

Underlying net profit came in at US$106.5m (+61.9%, +61.3% in cc). OCF fell c75% to US$12m, reflecting increased WC and Capex to support sales growth, with normalised cash conversion of 71.2% supporting c53% uplift in the dividend (US$0.32; targeted payout of 40-50%).

COVID-19 underpins gains; B/S solid; returns strong

Key takeouts

  1. Healthcare was the standout, with organic growth of 37.3%, strong volume growth across all key segments (Exam/Single Use +47.5%; Surgical +19.6%; Life Sciences +32.3%), with favourable price mix driving operating leverage (EBIT +81.1% in cc to US$100.4m; margins +444bp to 18.3%);
  2. Industrial was more modest, with sales up 7% in cc, with Mechanical down slightly (1%), but offset by gains in Chemical (+21.8%), with manufacturing efficiencies seeing EBIT +36.3% to US$57.9m and margins expanding 253bp to 14.9%;
  3. Capacity expansions (5 new lines in 1H, 8 new lines in 2H) to key segment demand (Surgical, Multi-Purpose, Chemical and Electrical gloves);
  4. in-house capacity of single use gloves/suits to more than double by FY22-23; and
  5. solid B/S (ND/EBITDA 0.7x) and returns (ROCE 16.3%; ROE 13.9%).

Balanced and diversified portfolio remains supportive

FY21 guidance was upgrade, as was expected from the last market update, targeting EPS US$1.60-1.70 (+28%-36%; previously US$1.35-1.45, +11-19%).

While the outlook points to slowing second half momentum (+4-18%), and note multiple risks (eg demand/supply imbalances; rising input costs; logistical concerns), we believe the pandemic has strengthened ANN's position and earnings trajectory given:

  1. a greater focus on PPE and hygiene;
  2. customers/distributors looking for long term agreements and supply certainty;
  3. likely sector consolidation; and
  4. capacity expansions driving volume gains.

Earnings changes; shares have run, but upside remains…Add

We have adjusted our FY21-22 earnings forecasts, increasing underlying earnings by up to 26%.

Our DCF/SOTP valuation rises (clients login to view), with a TSR (total shareholder return) of >10%. 

We move to an Add recommendation.

Find out more

View full report on Ansell's results, including target price – '1H exceptional – it's not too late to the party'.

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You can find further detailed analysis of further reporting season results by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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