Ansell Ltd

Ansell estimates that 58% of its business are cyclical (industrial and some of the single-use categories) while the remaining are relatively resilient (medical and sexual wellness). In terms of the group’s EBIT segmentation, Industrial forms 38%, Single Use (SU) at 27%, Medical is at 22% while Sexual Wellness (SW) is at 13%. In terms of EBIT margins, the highest is SU at 21.4% while the other 3 segments are between 13%- 14%. Their next major debt repayment is in mid-2019 and their debt profile (70% is fixed) has a 4.6-year average maturity rate (3.2% effective interest rate).

The group will continue to move up the high-value-add path, spending 1.4% of sales on Research and Development which is significantly high. Due to the specialized nature of their hand protection products, prices are not commodity driven and if there are fluctuations in raw material costs, the prices of their hand protection products do not vary much. Currently, they have benefited from the low commodity cycle. Even though the amount of nitrile producers has contracted, causing a rise in prices, they expect nitrile capacity will recover and prices will adjust downwards again. In general, if material costs increase by 2-3%, Ansell will maintain its product prices but if material cost fluctuations are ranging between 5-10%, they will adjust prices, which had been successfully. Positively, their customers do not expect them to pass back cost savings given that these hand protection products are safety and hazard-prevention necessities in their respective industries.

Ansell gloves forms a big part of the Industrial segment and key usage is largely in the chemical, electrical and O&G industries. It is a rather fragmented industry as they only have 14% global market share while they aim to hit 25%-30% in the future, while the second biggest player, Honeywell, only has 6% market share. Ansell has the number-one global market completion in terms of hand protection and has the broadest range of hand protection products while their next biggest competitor only has a third of the range. The top brand HyFlex (AUD200m) is the top-performing brand (35 various HyFlex hand protections) in terms of industrial usage; key highlights include the polymers it uses, which is now 8x more wear-resistant than previously. They have changed their approach in terms of distribution where they have the Ansell-Guardian selling program which uses a top-down approach with accredited experts. They have a distribution agreement with Grainger, which now uses 70% of products from Ansell (from 40%) which has increased its sales from AUD80m to AUD1010m.

The SU gloves segment is mainly targeted at the mechanics, chemicals and automotive which have high chemical and oil resistance requirements. Given the niche target of this segment, each glove is priced at about 10.0sen/glove vs. normal gloves of 2.0-3.0sen/glove. Their top brand is Microflex, which is their growth brand, which rakes in AUD145m sales; it is a 3-layered glove with nitrile on the outside, neo-print on the inside with a clear layer and is highly used in the chemicals industry.

Ansell is one of 3 major players in the Medical gloves segment and these 3 players have 70% market share. Surgical gloves require a lot of R&D. However, they did face some capacity constrains earlier, which has now been resolved. Ansell is very dominant in this area with 7 types of gloves. Additionally, they also do safety equipment for medical operations, including plastic covers for scalpels and plastic covers for surgical beds/fluid controls and a range of operating table covers with antibacterial padding. They also acquired a small company in the US (Preferred Surgical Products LLC) which specializes in infection prevention. For the more generic examination gloves, they are outsourced mainly to Malaysian glove players as the company prefers to focus on high-value-add products.

In terms of Ansell’s positioning in SW, they are 2nd in global positioning of branded condoms (1st is Durex). It has been made known that the group is looking to dispose of SW. The main rationale is that this segment requires a lot of marketing and sales efforts, which is not where Ansell prefers to position itself. As highlighted above, they are going for high-margin niche products in areas where the product has few competitors, resulting in better margins in the future. The segment will likely carry PERs of 19-20x, which is tough to continue growing and thus, they prefer to cash out and reinvest in the highly-specialized hand production segments, of which, some potentials have been targeted. It is noteworthy that most of their acquisitions are done below 10x PER; their criteria for acquisition is that the 3-year ROIC of the acquisitions must match their 7.5-8.5% WACC rate range and after 5 years, it must be equal to 1.5x of the company’s WACC rate. They hope to complete the disposal by next year.

To date, its 1Q17 set of results was very much on track and they are guiding FY17E EPS to improve by 4%-17% YoY. We do not have coverage on Ansell. Bloomberg has a consensus HOLD call on the stock with a consensus TP of AUD21.73.

Source: Kenanga Research - 2 Dec 2016