We are increasingly confident in the outlook for Ansell due to solid economic conditions, stable input prices and the potential for the company to deliver sustained market share gains as distributor partnerships bear fruit.
We also see potential for M&A activity given the group’s under-utilised balance sheet. The company’s transformation program will continue to weigh on reported results, but the promised savings should begin to become apparent with the FY18 result.
We see the following key drivers for the company:
Ansell has been rapidly expanding the number of distributor deals, with more than 50 reported in February, up from 21 at the end of FY17. Much of this increase involves smaller European groups, but Ansell has also signed a couple of large new US distributors. Combined, these arrangements should support a solid lift in market share over the next couple of years.
Revenue and earnings over the past three years have been held back by currency, a sharp drop in the sale of legacy products (particularly exam gloves), weak economic conditions (especially in Brazil and Russia) and surgical glove manufacturing constraints. As these challenges abate and currency turns positive, we expect growth to return.
Ansell’s key input prices, latex and butadiene, have remained fairly steady over the past 12 months. Some upward pressure is likely for synthetics, which are weakly correlated with oil prices, but we are confident the group will deliver stronger gross margins in the second half as it cycles the 2017 latex price spike.
Taking these positive dynamics into account, we have increased our FY18 and FY19 earnings estimates by 2–3%. We maintain our Accumulate recommendation on Ansell and have raised our target price to $29.00 from $26.80, reflecting a sustained lift in our sales growth forecasts.