The company was well-known as a condom manufacturer — it owned the premium brand Skyn — but chose to divest this business in 2017, as industry-wide overcapacity and slowing growth across emerging markets depressed earnings with no recovery in sight.
To management's credit, the USD $520mil sale of the condom business to a Chinese consortium came at the upper end of analysts' expectations. It enabled Ansell to pursue its transformation towards the personal protection business for healthcare, life sciences and industrial workers.
The latter required a series of acquisitions to build up a comprehensive portfolio, with $1.1bn spent on external growth over the 2010-2019 period. Divestments funded half of that amount, fresh equity — $359mil at about $30 per share six years ago — and debt issues the other half.
Total return on investment remains modest, but that isn't management's fault. In effect, the protective gear industry is saturated and commoditized, with no barriers to entry as well as market share gains primarily driven by pricing. There characteristics put a ceiling on organic growth prospects and achievable margins.
Still, the portfolio revamp coupled with an extensive restructuring of manufacturing operations improved operating margins by ~150-200bps, "unusual" costs included. Ansell optimized its footprint and closed three plants — in Mexico and South Korea — while upgrading existing facilities in Vietnam, Malaysia, Sri Lanka and Bangkok.
As in every commodity business, survival rests upon counting among the lowest cost operators. The manufacturing base is undemanding in terms of investments — with capital expenditures of ~$50-60mil against cash from operations of ~$180-220mil — but pricey acquisitions are necessary to achieve growth. Going forward, management made no mystery of their intention to complete at least one buyout per year.
Solid financial standing should support these efforts. Total liabilities of $966mil are almost fully covered by current assets, of which $397mil in cash. Balance sheet strength provides substantial investment flexibility, with $1.2bn in M&A capacity and interest expense ($19mil) covered x12 by operating earnings before depreciation and amortization ($237mil).
Following its streak of acquisitions, the company has redirected cash-flows towards returns of capital to shareholders. Distribution of dividends increased from $50mil in 2013 to $62mil in 2019. Share buybacks reached $364mil over the last four years, as the stock traded at about x16-x18 EPS. The fact that management favored buybacks over distributions suggests that they expect earnings growth above industry averages over the next decade. Analysts think likewise.
Speaking of management, the team that took over in 2005 and restructured the company — which had been weakened by many years of underinvestment at Dunlop — is retiring. Chairman Glenn Barnes has already departed, and CEO Magnus Nicolin should pass the baton before next year. The duo leaves a solid foundation to the new leadership, who steps in as a dramatic economic downturn is unfolding.
Nevertheless, Ansell's business should prove relatively immune to the crisis, at least within the healthcare segment — roughly half of consolidated revenue — for the company obviously stands on the front lines of combating the spread of COVID-19. It is currently booking record orders for gloves, masks and other protective gears, and that trend shouldn't abate any time soon.
These events also came as it was delivering solid results, propped up by a balanced portfolio, solid momentum in the industrial business, as well as a strong U.S. dollar — although Australian, the company invoices its clients and reports its results in the American currency.
These developments have led analysts — whose consensus is surveyed in real time by MarketScreener — to raise their ratings and estimates, even with the stock trading at x19 forward earnings . The latter has been added to the Europa One fund that Surperformance — MarketScreener's editor and parent company — advises on an exclusive basis.