Ansell (ANN): 1H exceptional
About the author:
- Author name:
- By Dr Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 17 February 2021, 11:20 AM
- Sectors Covered:
- 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.
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
- 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%);
- 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%;
- Capacity expansions (5 new lines in 1H, 8 new lines in 2H) to key segment demand (Surgical, Multi-Purpose, Chemical and Electrical gloves);
- in-house capacity of single use gloves/suits to more than double by FY22-23; and
- 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:
- a greater focus on PPE and hygiene;
- customers/distributors looking for long term agreements and supply certainty;
- likely sector consolidation; and
- 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'.
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.
Reporting Season Calendar
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