Ansell: FY21 a dynamic year, but now much better positioned

About the author:

Dr Derek Jellinek
Author name:
By Dr Derek Jellinek
Job title:
Senior Analyst
Date posted:
25 August 2021, 7:30 AM
Sectors Covered:
Healthcare

  • FY21 was in line with guidance, albeit below our expectations, with record organic sales and underlying earnings growth driven via unprecedented PPE demand.
  • Healthcare increased scale on COVID gains, high efficiency new manufacturing and account wins, while Industrial captured market share on multirange products.
  • While FY22 guidance is wide (NPAT -9% to +2%) as short term risks remain (eg demand/supply imbalances; swings in inputs cost/logistics; closures/reduced ops in South East Asia on COVID Delta spread; CEO transition), we continue to believe the rebased business is in a much stronger position over the medium/longer term.
  • We adjust FY22-23 estimates, with our DCF/SOTP price target decreasing to (login to view). Add.

Event

FY21 results were at the low end of guidance, but below expectations, with EPS US$1.92 (+50.8% in cc; guidance US$1.92-2.02; US$1.94 ex-cloud computing accounting change; consensus US$1.98; Morgans US$2.00) on record sales of US$2,026.9m (+22.5% in cc; organic +22.5% in cc; Morgans US$2,032m).

GM increased 120bp to 35.7%, on higher production volumes, manufacturing efficiencies/pricing, with SG&A expenses tightly controlled (% sales: -160bp to 19.4%) supporting EBIT (US$338m, +51.4% in cc) and margin (+327bp to 16.7%).

OCF fell c75% to US$49.2m, reflecting increased WC and capex to support sales growth, with cash conversion of 61% and c5.6% uplift in the final dividend (43.6c).

Analysis

Not surprising, the Healthcare division (61% of revs; 74% of EBIT) was the standout, with strong volume growth across all key segments (Exam/Single Use +45.2%; Surgical +13%; Life Sciences +35.3%), with favourable price/mix driving operating leverage (EBIT +66.1% in cc to US$248.8m; margins +420bp to 20.1%).

The Industrial division (39% of revs; 26% of EBIT) was more modest, with sales up 7.1% in cc (US$790.7m), but manufacturing efficiencies along with increased demand from either a focus on COVID related safety or improving global economic recovery, supporting a +140bp uplift in operating margins to 14.2%.

FY22 guidance is wide (EPS US$1.75-1.95 (-9% to +2%) on multiple risks (eg demand/supply imbalances; vagaries in inputs costs and logistics; and short term closures/reduced ops in South East Asia on COVID Delta spread), not to mention CEO Magnus Nicolin hanging up his celts and turning the reins over to 8 year company veteran and former CFO (now head of Industrial division) Neil Salmon.

That said, most issues appear temporary and we continue to believe the rebased business has strengthened its position given: 1) a much greater focus on PPE and hygiene; 2) customers/distributors looking for long term agreements and supply certainty; 3) likely sector consolidation; 4) capacity expansions supporting volumes; and 5) a solid B/S with US$464m in liquidity for further strategic expansion and investments.

Forecast and valuation update

We expect organic volumes to be solid, but below unparalleled FY21 levels, and margin pressure mainly on near term supply disruptions, resulting in FY22 net profit decreasing up to 7%.

Our blended DCF, SOTP valuation decreases to (login to view).

Investment view

While the unprecedented demand for PPE will eventually slow, it is unlikely to fall off a cliff, with support merely shifting from COVID-driven products to more differentiated ones on the back of vaccine rollouts and improving economic outlook.

Price catalysts

AGM 11 Nov-21; Dividend record date 31 Aug-21; Dividend payment 16 Sept-21

Risks

Lower volumes than expected; limited pass-through pricing; modest gains from manufacturing efficiencies; margin compression; regulatory intervention; market share loss; risk from acquisitions/divestures; and unfavourable FX.

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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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