Company Overview: Ansell Limited (ASX: ANN) manufacturers protective industrial and medical gloves. The company’s expertise, innovative products, trusted brands, and advanced technologies aid it to build customer confidence by offering solutions for new requirements.  The company has two operating business segments, namely Industrial and Healthcare. ANN has its operations in North America, Latin America/Caribbean, EMEA and the Asia Pacific.

ANN Details 

ANN Rides on Geographical Expansion & Higher Investments: ANN remains on track to expand its global sales force, reduce the concentration risk, and offer market-leading coverage and capabilities. With a sales presence in more than 55 countries, substantial investment in new capacity at its manufacturing operations around the world, and 14 manufacturing facilities across the globe, including a new manufacturing facility in Russia, ANN remains well equipped to meet greater demand for its products in numerous PPE markets.

A Quick Look at FY21 Key Highlights:

• Achieving Impressive Growth in Top-Line: In FY21, total sales stood at US$2,026.9 million, up by ~25.6% YoY, thus, accomplishing impressive organic growth in sales across the business, which went up ~22% on pcp. Growth amplified on the heels of Healthcare Global Business Unit (HGBU) momentum (up 34.8% on pcp) and improved Industrial Global Business Unit (IGBU) performance (up 7.1% on pcp).
• Improvement in EBIT Margin & Net Profit: The company witnessed a significant improvement in EBIT margins to 16.7% in FY21, which resulted in EBIT growth of more than 50% on a constant currency (cc) basis. Growth in EBIT was backed by higher production volumes, favourable pricing/mix, and SG&A operating leverage. In FY21, profit skyrocketed 57.5% year over year and 48.5% increase on a constant currency basis, owing to higher sales and expansion in GPADE margins.
• Higher Investments to Support Future Growth: In FY21, ANN increased its capital expenditure by 36% to support growth in FY22 & beyond and increase its dividend. Notably, the company declared a final dividend of US43.6 cents, depicting a rise of 53.6% year over year, taking full-year dividends to US76.8 cents.
• Temporary Weakness in Cash Flows: Cash flows from operations stood at US$49.2 million at a cash conversion of 60.9%. This depicted a decline of 74.3% year over year. The temporary weakness is primarily owed to capex investment and unfavourable working capital movements.
• Greenfield Investments: ANN’s $80 million greenfield investment in India is in line with its key strategic priorities, which, in turn, will support significant growth, enhance its product differentiation, and strengthen the overall sourcing network.
• Rise in Net debt: At the end of 30 June 2021, the company’s net debt stood at US$279.9 million, as compared to US$171.4 million at the end of FY20. The increase in net debt was on the back of additional capital employed.

The below picture depicts ANN’s record Sales, earnings performance, and others key financials for FY21. 

Key Financial Highlights; Analysis by Kalkine Group

Key Metrics: In FY21, gross margin of the company stood at 40%, higher than the year-ago figure of 39.2%.  EBITDA margins for FY21 stood at 21.1%, compared to 17.4% reported in FY20. The cash cycle days in FY21 came in at 97.3 days, lower than the industry median of 126.1 days.

Profitability Profile; Analysis by Kalkine Group 

Buy-back Update: As published on 15 December 2021, ANN has purchased 2,864,588 shares via on-market trade with the consideration of ~$84,269,559.85 under buy-back event.

Top 10 Shareholders: The top 10 shareholders together form around 25.42% of the total shareholdings, while the top 4 constitutes the maximum holding. The Vanguard Group, Inc. and Vinva Investment Management Limited are holding a maximum stake in the company at 5.58% and 4.99%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:  The drainage in cash balances was enormously attributed to high capital expenditure and a substantial increase in working capital management. ANN shall hold tight on working capital, considering potential threats from the new variant of COVID-19. Considering global operations, ANN is subject to volatilities in foreign currency markets. Higher freight costs and shipping postponements are also expected to continue throughout FY22. Further, a leveraged balance sheet and increased COVID-19 cases in Southeast Asia add to the woes.

Outlook: In FY22, ANN expects EPS to be in the ambit of 175 – 195 US cents. Further, it is estimated that new interest expense will fall between $20.0 million - $21.0 million at an effective tax rate of 22.0% – 23.0%. In FY22, the company expects higher software investments to boost capacity and enhance ANN’s manufacturing efficacy and organic growth. The company remains focused on new product development and aims to bolster the manufacturing capabilities to support the increasing demand for safety solutions. It also stays on track to deliver significant value to its shareholders through the continuous payment of dividends and investment in new and latest technological know-how.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~22.1% in the past six months. Currently, the stock is trading close to its 52-weeks’ low level of $30.13. The stock of the company has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount compared to its peers, considering risks related to COVID-19, COVID-19 cases in Southeast Asia, foreign currency risk, increased freight costs and shipping delays, rising net debt, etc. For the purpose of valuation, peers such as Sigma Healthcare Ltd (ASX: SIG), Sonic Healthcare Ltd (ASX: SHL), and other have been considered. Taking into account the aforesaid fact, ANN’s commitment to lead PPE and Healthcare services, diversified portfolio, geographical expansion, enhancing shareholder’s value, decent fundamentals and long-term outlook, current trading levels, and indicative upside in valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $31.46 as on 15 December 2021, 12:30 PM (GMT+10), Sydney, Eastern Australia.

ANN Daily Technical Chart, Data Source: REFINITIV 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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