No Surprise As Ansell Upgrades FY21 Outlook

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Ansell's products are readily tailored to the waves of coronavirus sweeping the world so it is no surprise guidance for FY21 has already been upgraded.

-Persistent demand for PPE expected throughout FY21
-Balance sheet provides potential for M&A
-Industry supply improving
 

By Eva Brocklehurst

Ansell's ((ANN)) diverse portfolio of specialty protective gloves appears almost tailored to the outbreak of a highly infectious disease so an upgrade to guidance for FY21 so early in the year is no surprise.

The company has revised FY21 guidance for earnings per share to US$1.35-1.45, up 6% on prior guidance at the mid point, and 11-19% ahead of the prior year. Guidance has been underpinned by higher sales, favourable FX movements and successful management of cost increases.

Credit Suisse estimates exchange rate movements added US$0.02 to earnings per share (EPS). Ord Minnett estimates FY21 EPS of US$1.43, implying 17% growth and including a US$0.02 currency benefit.

Ansell has increased its growth target for EPS to 6-12% in constant FX for the medium term. Adjusting for the update, pushes Ord Minnett's revenue growth forecast to 11.6%. Offsetting this, supplier costs have increased which leads the broker to lower margin estimates.

Strong demand persists for personal protective equipment (PPE), particularly examination/single-use gloves in the pharmaceutical, non-acute and medical industries. With the return of elective surgery there has also been a recovery in demand for surgical gloves. Credit Suisse believes the increase in demand is partially structural and will persist post the pandemic.

Citi agrees the company is anticipating demand for medical gloves as a result of the pandemic will remain elevated for longer than what the market is currently visualising. The broker anticipates upside risk to FY21 earnings because of the second wave of coronavirus.

Citi then assumes sales normalise in FY22 and growth rates ease back. Beyond the pandemic, an un-geared balance sheet provides potential for upside in the form of M&A and/or share buybacks. Despite the strong balance sheet Credit Suisse does not expect any buyback in FY21 and estimates there is US$400m in capacity to pursue M&A or a capital return.

Management has signalled that capital expenditure, including increases in capacity, is continuing in line with budget.

As infection rates are increasing again in many countries demand for products such as specialty gloves should act as a buffer to any further slowdown in industrial glove sales, UBS assesses. On this theme, Ord Minnett increases industrial earnings and margin estimates slightly because of changes in product mix expectations towards higher-margin gloves.

Competition?

Morgan Stanley points out rising nitrile prices, owing to supply issues, could put pressure on small manufacturers and this may lead to a more favourable industry structure.

The broker assumes a contraction in the market from FY22 onwards, although in a scenario where FY21 market expansion is maintained estimates for Ansell would move 12% and 18% higher in FY22 and FY23, respectively.

Morgan Stanley suspects the early timing of the upgrade to FY21 guidance is a sign of conservatism and anticipates the benefit from the pandemic will disappear at some stage, but given the company's view of severe capacity constraints in PPE, it is entirely possible benefits can extend into FY22.

Macquarie is much more cautious. The business may be leveraged to increased demand for personal protective equipment associated with the pandemic in the short term but over the medium term momentum is less assured. The broker highlights the industry supply/demand balance is improving amid increased capacity among competitors.

UBS believes Ansell has moved successfully to take advantage of the seemingly insatiable demand for single use/examination gloves as it relates to management of the infection.

The broker acknowledges predicting how long demand lasts is difficult. Increasing expansion amongst global manufacturers of single-use gloves signals equilibrium should be reached at some stage in the next 12-24 months, although this will be dependent on the ability of countries to control the second and third waves of covid-19.

FNArena's database has four Buy ratings, two Hold (including Morgans which has not yet commented on the update), and one Sell (Macquarie). The consensus target is $41.09, signalling 0.3% upside to the last share price.

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