Equities: Ansell Limited Buy

Transcription

Equities: Ansell Limited
05 October 2011 ‫ ׀‬ASX Code: ANN ‫ ׀‬Healthcare
There is value in protection
Event
We initiate coverage on Ansell (ANN) with a Buy recommendation and 12month price target of $14.60ps.
Implication
Industrial acquisitions make sense: we identify two potential deals which
could rapidly fill important geographic and product coverage gaps in ANN’s
portfolio. An acquisition of major competitor Showa Best Glove and/or niche
player Hexarmor would likely be highly value accretive and low risk. We
consider ANN well positioned to weather a challenging industrial production
environment with its leading industrial brands and successful Guardian sales
program.
Medical outlook improving: the ongoing transition to differentiated and higher
value synthetic surgical gloves should reduce exposure to volatile natural
latex pricing and improve group margins. The recent Sandel acquisition is
also likely to provide upside surprise (over the medium-term) as ANN
leverages its global sales force to expand distribution over a relatively fixed
cost base.
Sexual Wellness turnaround: with the issues around its Polish condom
business largely addressed, we expect EBIT margins in the division to trend
towards that of its two larger competitors. This improved performance should
be driven by the success of ANN’s SKYN brand, better pricing as well as
significant growth in emerging markets (China, India and Brazil).
Company-wide cost out and efficiency gains: ANN is in the process of
upgrading its IT systems (project Fusion) to significantly simplify its business
processes and improve operational efficiency. The consolidation of brands
and product SKU’s should reduce wastage, increase manufacturing efficiency
and focus marketing efforts which should help defend/drive margin
improvements in an environment of raw material price headwinds.
Takeover premium warranted: we believe each of ANN’s individual business
Buy
Price target
$14.60
Share price
52-week range
Forecast price return
Forecast dividend return
Forecast total return
Market cap
$13.02
$12.40 - $14.53
12.1%
2.7%
14.8%
$1,732m
Forecasts and ratios
Year end Jun
10
11
12f
13f
14f
NPAT $m
96
110
125
142
147
114.8
EPS c
72.0
83.0
96.6
110.9
EPS growth %
15.2
15.2
16.3
14.8
3.5
P/E x
15.4
18.3
12.7
11.1
10.7
EV/EBITDA x
10.1
12.9
8.9
7.7
6.7
DPS c
27.3
32.6
36.9
36.8
34.4
2.5
2.1
3.0
3.0
2.8
Yield %
Price relatives ($)
15.00
14.50
14.00
13.50
13.00
12.50
12.00
11.50
11.00
Oct 10
Jan 11
Apr 11
Jul 11
S&P/ASX 200
ANN
The S&P/ASX200 has been re-based to the stock’s starting
share price.
units represent a strategic takeover opportunity for global trade buyers
including Dupont and 3M (Industrials), Top Glove (Medical) and Procter &
Gamble (Sexual Health). Conversely, ANN could leverage its leading gloves
business and become a broader supplier of personal protective equipment.
Earnings and valuation
We model ANN on a USD basis. Our DCF valuation for ANN is USD15.02ps
and our Sum-of-Parts valuation is USD13.35ps. Our 12-month price target is
AUD14.60ps and is based on a blended DCF/SOTP valuation. We expect EPS
growth of 15.3% in FY12f, and 14.6% in FY13f.
Investment view
Buy recommendation: ANN is a conservatively run, defensive business with a
forecast strong long-term earnings growth profile and potential upside from
M&A. At 12.7x FY12f PE, it offers compelling relative value to other healthcare
stocks in our coverage realm. We initiate with a buy recommendation.
Short term catalysts: a positive update at ANN’s AGM on 17 October and
easing latex prices.
Bruce Du, CFA T. +613 9675 6244
E. [email protected]
Natalie Kelly T. +613 9675 7107
E. [email protected]
Important Disclosures and analyst certifications regarding subject companies are in the Disclosure and Disclaimer Appendix of this document and at
www.research.commbank.com.au. This report is published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.
Global Markets Research
Financials (US$m)
Profit & Loss
FY10
FY11
FY12f
FY13f
FY14f
Company Information
Revenue
1086.2
1206.9
1344.2
1416.3
1467.1
Financial Year End Date
Expenses
936.0
1050.9
1156.7
1208.9
1244.8
Last Reported Year
2011
EBITDA
150.2
156.0
187.6
207.4
222.2
Reporting Currency
USD
22.9
19.1
26.7
28.1
40.4
Valuation Currency
Depreciation & Amort
Associates
EBIT (inc assoc)
127.3
136.9
160.9
179.3
181.8
Net Interest
8.6
3.8
4.7
2.7
-1.1
Other pre-tax profit
0.0
0.0
0.0
0.0
0.0
118.7
133.0
156.2
176.7
182.9
32.6
Profit Before Tax
Tax
13.02
Price Target
14.60
Valuation
13.49
Comparable Companies
19.6
28.4
31.5
2.9
3.1
3.0
3.3
3.4
Segment Data
Other after tax
0.0
0.0
0.0
0.0
0.0
Sales
96.0
110.2
124.8
141.9
146.9
Specific Items
Reported Profit
106.2
121.7
136.7
155.1
160.5
Goodwill after tax
CBA Profit
FY10
FY11
FY12f
FY13f
FY14f
Industrial
397.0
471.6
532.7
571.9
601.1
Medical
352.8
359.2
400.2
411.1
416.3
New Verticals
166.1
175.5
184.7
192.5
200.0
SH&WB
170.3
200.6
226.6
240.7
249.7
Industrial
65.8
81.9
95.7
106.0
110.2
Medical
46.6
39.2
47.7
50.0
50.0
New Verticals
10.7
2.5
0.4
2.8
7.8
SH&WB
13.8
21.9
26.0
30.0
33.0
EBIT
Intangibles after tax
Other
Buy
Recommendation
19.8
Pref div paid
AUD
Share Price
Minorities
NPAT
30 Jun
0.0
0.0
0.0
0.0
0.0
96.0
110.2
124.8
141.9
146.9
Balance Sheet
FY10
FY11
FY12f
FY13f
FY14f
Liquid Assets
199.8
258.7
163.9
247.0
358.6
Operating Metrics (%)
FY10
FY11
FY12f
FY13f
FY14f
Net Receivables
164.7
192.7
241.9
250.6
261.8
EBITDA margin
13.8
12.9
14.0
14.6
15.1
Current Assets
551.1
660.4
676.2
780.6
914.0
EBIT margin
11.7
11.3
12.0
12.7
12.4
0.1
0.1
0.1
0.1
0.1
Net Profit Margin
8.8
9.1
9.3
10.0
10.0
17.6
Investments
Receivables
0.9
1.6
1.6
1.6
1.6
ROIC (NOPLAT)
17.1
17.6
17.1
17.6
Property, Plant & Equipment
139.5
150.4
173.2
183.1
193.3
Return on Assets
14.1
13.2
13.4
14.6
14.6
Non Current Assets
551.3
637.7
683.9
698.8
690.2
Return on Equity
18.2
17.5
17.4
18.2
16.5
Trade Creditors
-115.9
154.1
178.6
220.0
229.9
236.8
Net Debt (m)
49.4
-16.0
78.8
-4.3
Borrowings
48.4
197.7
197.7
197.7
197.7
Net Debt / EBITDA (x)
0.3
-0.1
0.4
0.0
-0.5
Provisions
57.8
77.0
77.0
77.0
77.0
ND / ND+E
8.0
-2.3
9.6
-0.5
-13.6
260.3
453.3
494.7
504.6
511.5
Net Interest Cover (x)
14.8
35.6
34.2
67.6
-166.4
0.0
0.0
0.0
0.0
0.0
Effective Tax Rate
16.7
14.8
18.2
17.8
17.8
200.8
45.0
45.0
45.0
45.0
FY14f
Current Liabilities
Convertible Debt
Borrowings
Provisions
61.9
59.4
59.4
59.4
59.4
Per Share Data (c)
FY10
FY11
FY12f
FY13f
Non Current Liabilities
277.5
121.6
121.6
121.6
121.6
EPS Shares (m)
133.3
132.8
129.3
128.0
128.0
Shareholder Capital
756.0
954.0
880.9
880.9
880.9
Reported EPS
79.7
91.7
105.7
121.1
125.4
Normalised EPS
72.0
83.0
96.6
110.9
114.8
Dividends
27.3
32.6
36.9
36.9
34.4
37.9
39.3
38.2
33.2
30.0
420.1
532.7
567.2
650.2
739.8
87.7
60.0
43.2
111.2
121.7
FY10
FY11
FY12f
FY13f
FY14f
1.4
1.7
1.2
1.1
1.0
EV / EBITDA
10.1
12.9
8.9
7.7
6.7
8.1
Minorities
11.8
14.6
17.6
20.8
24.2
Reserves
-27.3
-111.8
-111.8
-111.8
-111.8
Other Equity
-175.9
-133.6
-43.0
63.2
177.9
Payout Ratio (%)
Total Equity
564.6
723.2
743.7
853.2
971.2
Book Value
Free Cash Flow
Cash Flow
FY10
FY11
FY12f
FY13f
FY14f
Operating Profit
180.8
142.3
118.6
195.6
207.3
0.0
0.0
0.0
0.0
0.0
-7.9
-3.8
-3.3
-4.0
-0.6
Operating Cash Flow
159.8
124.2
98.7
173.2
187.6
EV / EBIT
11.9
14.7
10.4
8.9
Capex
-28.1
-44.5
-42.9
-30.9
-31.9
Reported P/E
13.9
16.5
11.6
10.1
9.8
0.0
0.0
0.0
0.0
0.0
Normalised P/E
15.4
18.3
12.7
11.1
10.7
-41.4
-43.0
-72.9
-43.0
-31.9
1.0
1.1
0.9
3.1
3.0
0.0
3.8
0.0
0.0
0.0
Dividends Paid
-37.3
-41.8
-47.6
-47.2
-44.1
FY10
FY11
FY12f
FY13f
FY14f
Net Borrowings
16.0
75.2
0.0
0.0
0.0
8.3
11.1
11.4
5.4
3.6
-145.2
-56.9
-120.7
-47.2
-44.1
EBITDA
15.1
3.9
20.2
10.6
7.1
Dividends Received
Net Interest Received
Payments for Investments
Investing Cash Flow
Capital Raisings
Financing Cash flow
Multiples (x)
EV / Sales
PEG
Growth Rates (%)
Sales
Total Cash Change
-20.0
58.9
-94.8
83.1
111.7
EBIT
18.6
7.5
17.5
11.5
1.4
Cash at End of Year
199.8
258.7
163.9
247.0
358.6
Normalised EPS
15.2
15.2
16.3
14.8
3.5
Source: Company data, CBA
2
Contents
There is value in protection ......................................................................................... 1
Event................................................................................................................................................................................. 1
Implication ........................................................................................................................................................................ 1
Earnings and valuation ..................................................................................................................................................... 1
Investment view ................................................................................................................................................................ 1
Financials ........................................................................................................................................... 2
Executive summary ........................................................................................................................... 5
Revamped GBUs driving above average growth ............................................................................................................. 5
Lots of upside to our AUD14.60 price target ................................................................................................................... 5
Investment view ................................................................................................................................................................ 5
Valuation ........................................................................................................................................................................... 6
Section 1: A solid platform for growth .............................................................................................. 7
M&A activity expected near-term ..................................................................................................................................... 7
ROE shows a strong integration record ........................................................................................................................... 7
Project Fusion presents material upside .......................................................................................................................... 8
Section 2: Industrial glove M&A opportunities ................................................................................. 9
Well positioned for acquisitions ....................................................................................................................................... 9
Who is a potential target for ANN? .................................................................................................................................. 9
Showa Best Glove – a large potential deal but worth it ................................................................................................... 9
The potential deal makes financial sense....................................................................................................................... 10
Niche glove suppliers – small value adds ...................................................................................................................... 11
Hexarmor ........................................................................................................................................................................ 12
Revenue and product synergies..................................................................................................................................... 12
Section 3: Strong Industrial glove growth drivers .......................................................................... 14
ANN winning market share ............................................................................................................................................. 14
OH&S to drive volume growth and mix changes ........................................................................................................... 15
Industrial segment financial forecasts ............................................................................................................................ 15
Section 4: Medical – underlying improvement masked by headwinds ......................................... 16
Commodity exposure ..................................................................................................................................................... 17
Sandel acquisition a glimpse of things to come ............................................................................................................ 18
Medical segment financial forecasts .............................................................................................................................. 18
Section 5: Sexual Wellness margins back in mid-teens ................................................................ 19
SKYN a star performer ................................................................................................................................................... 19
The action is in emerging markets ................................................................................................................................. 20
Not shying away from price rises ................................................................................................................................... 21
Restructuring should deliver on several fronts ............................................................................................................... 22
Competing with the big boys ......................................................................................................................................... 22
Sexual Wellness financial forecasts ............................................................................................................................... 23
Section 6: ANN – hunter or the hunted? ......................................................................................... 24
PPE market overview ..................................................................................................................................................... 24
ANN as a potential takeover target ................................................................................................................................ 25
Opportunities in diversification ....................................................................................................................................... 25
Section 7: Key risks ......................................................................................................................... 27
A steep and synchronised decline in global industrial production................................................................................. 27
Low cost manufacturers and white label products ........................................................................................................ 27
Latex price sensitivity ..................................................................................................................................................... 28
3
Earnings forecasts and relative valuation ...................................................................................... 29
Appendix 1: Company and industry background .......................................................................... 31
Company overview ......................................................................................................................................................... 31
GBU summaries ............................................................................................................................................................. 32
ANN strategy .................................................................................................................................................................. 33
Financial performance .................................................................................................................................................... 33
Management .................................................................................................................................................................. 34
Appendix 2: Input costs pressures to remain ................................................................................ 35
Latex market ................................................................................................................................................................... 36
Medical glove market ..................................................................................................................................................... 36
Appendix 3: ANN global peer comparables ................................................................................... 38
4
Executive summary
Over the last 19 months, ANN has undergone a significant transformation under the leadership of
CEO Magnus Nicolin. With the realignment of the global business units (GBUs), regional teams
complete and the roll-out of project Fusion (a new Oracle enterprise IT system) underway, we
consider the company well positioned to execute on its growth strategies.
Revamped GBUs driving above average growth
Industrial glove volume growth remains robust driven by share gains in the core mechanical
(Hyflex) and chemical (AlphaTec) categories. We expect volume growth to moderate in FY12f
given expected softness in global industrial production, however emerging market growth and
the Guardian program should underpin further share gains.
Growth driven by
Industrials but
profitability improving
in medical and sexual,
and they diversify ANN
Medical glove growth should be relatively flat in volume terms, however price increases and
ongoing mix shift towards synthetic surgical gloves should drive EBIT improvement. We also
highlight upside risks from the recent Sandel acquisition as ANN leverages its sales and
marketing resources to rollout distribution globally (currently in nine countries outside US).
With the issues around its Polish condom business largely resolved, the ongoing rollout of the
premium SKYN platform and growth in emerging markets should turn around the division. We
expect EBIT margins to reach the “mid-teens” over the medium-term, comparable to peers
such as Reckitt Benckiser (which owns Durex), and Church and Dwight (which owns Trojan).
Lots of upside to our AUD14.60 price target
Industrial glove consolidation: ANN is the global leader with only ~10% market share. We
identify two potential acquisition opportunities which could rapidly fill important geographic
and/or product coverage gaps in the industrial portfolio, which are likely to be highly accretive
and low risk.
Targeted bolt-on deals in Medical: ANN can readily leverage its global sales and marketing
capabilities by pursuing niche acquisitions in areas complementary to gloves. The recent
Sandel transaction is an example which we believe will materially surprise to the upside.
Market appears to be
Project Fusion benefits: the rollout of the new enterprise IT system is expected to generate
attributing limited value
significant operational efficiencies from FY13/FY14 with material financial incentives linked to
successful implementation. We estimate potential cost savings of up to $15m pa (+7.7% to
to Project Fusion
benefits and New
FY14f EPS) which represents upside risk to our forecasts.
Verticals
New verticals ‘blue sky’: we consider the segment to represent a free option on the potential
turnaround in several underperforming assets. An example is the renewed focus on the
construction glove and auto aftercare market. We are not factoring a material improvement in
this business, however any turnaround represents upside risks to our forecasts.
In addition, each of ANN’s business segments represent high quality, strategic assets which we
expect would be of interest to potential trade buyers, particularly given global consolidation
activities in the protective equipment and sexual health markets in recent years. We believe the
company deserves to trade at a significant premium to its peers to reflect this value.
Investment view
We have a
conservative 3-year
EPS CAGR of 10%
ANN is trading on a forward PE of 12.7x which represent a 5% discount to the ASX200 industrials
ex-financials index and 11% discount to our $14.60 price target. We believe the shares are cheap
given the forecast growth profile of the business and its defensive characteristics. We
conservatively forecast average compound EPS growth of 11% pa over the next three years.
On an EV/EBITDA basis, ANN is trading on a forward multiple of 8.9x which is cheap in our view
when considering the attractive nature of the assets to potential trade buyers.
5
Valuation
Our standalone DCF valuation is USD15.02ps and our SOTP valuation is USD13.35ps.
Our USD14.60 valuation is derived using a blended DCF and SOTP methodology with 75%
weighting towards the DCF and 25% to the SOTP. The lower weighting for the SOTP is due to
trough cycle multiples and earnings for ANN’s global peer comparables.
We initiate coverage
with a BUY and
AUD14.60 price target
Rolling forward our blended valuation by ANN’s cost of equity and subtracting dividends yields,
our 12-month price target is USD15.81ps. We then convert this using CBA’s one-year average
AUDUSD forecast to derive our AUD14.60 price target. The implied 12-month TSR is 14.8%.
Tables 1 and 2 summarise our DCF assumptions and valuation.
Table 1: DCF assumptions
Table 2: DCF valuation (USDm)
DCF valuation
DCF assumptions
Beta
Risk free rate
Equity risk premium
After tax cost of equity
After tax cost of debt
Debt to EV
Equity to EV
WACC
1.1
6.0%
6.0%
12.60%
5.95%
30%
70%
10.61%
Terminal growth rate
3.0%
Source: CBA
Terminal year
PV of forecast cash flows
PV of terminal value
Enterprise value
FY21
906
1,077
1,982
less: net debt
Equity value
-$15
1,997
Shares outstanding (m)
Value per share
133
$15.02
Our SOTP valuation is based on global peer multiples (Appendix 3). We have applied a premium
to the average of comparable peer multiples given ANN’s businesses occupy leading market
positions in their respective sectors and offer, in our view, a more defensive earnings stream.
Table 3: ANN SOTP valuation (USD)
Industrial
Medical
Sexual Health and Well Being
New Verticals
Net Corporate / Other
Enterprise value
Less: (Net debt)/Net cash
Ordinary equity value
Shares outstanding (m)
Value per share
FY12f EBIT
($m)
Avg peer EV
multiple (x)
Premium
applied to
ANN
EV multiple
(x)
Valuation
($m)
95.7
47.7
26
0.4
-2.5
9.84
8.66
10.95
10%
5%
10%
10.8
9.1
12.0
8.0
10.0
1035.9
433.7
313.2
3.2
-25.3
1760.7
15.0
1775.7
133.0
$13.35
We believe our SOTP valuation is conservative given:
We consider ANN’s international peer earnings and multiples to be at cyclical troughs.
ANN’s significant investment in project Fusion is expected to lower corporate costs. The
benefits of this investment are not expected to materialise until FY14f and are not captured in
FY12f EBIT.
Using recent
transaction multiples,
our SOTP valuation
would be USD18.40
We have not explicitly factored in any takeover premium for ANN’s assets, however if we
applied recent sector transaction multiples (18.6x EBITDA for SSL and 13.5x EBITDA for
Sperian), our SOTP valuation would be 38% higher at USD18.40.
6
Section 1: A solid platform for growth
With the GBUs and supporting regional teams now established and the company in excellent
financial condition, we consider ANN well positioned to execute on its growth priorities. These
priorities encompass two focus areas:
M&A and efficiency
focus is inherent in all
4 GBUs
Growth by acquisition: ANN has historically had a strong track record of acquiring, integrating
and leveraging assets across its various business groups and we expect a continuation of this
strategy.
Operational efficiencies: ANN is currently in the process of consolidating and reducing
product/SKU complexity across its businesses which should lead to greater manufacturing
and sales force efficiencies. In addition, the material investment in Project Fusion should
significantly improve operational and working capital efficiency.
M&A activity expected near-term
CEO Magnus Nicolin has extensive experience developing and growing consumer brand
businesses through his previous executive role at Newell Rubbermaid.
CFO Rustom Jilla’s responsibilities have increased and he now also heads up the business
development team with a focus on M&A activity.
We are confident M&A
will ramp up over the
next ~5 years
The global industrial glove market is highly fragmented with the top six players accounting for
less than 25% total share. We believe there is scope for consolidation.
ANN has a net cash balance sheet position and continues to generate strong free cashflows.
Even with the 5m share buyback, we believe the company could borrow up to $250m for
acquisitions without raising new equity while keeping its BBB- investment grade credit rating.
ROE shows a strong integration record
Figure 1 shows that ANN has completed nine major acquisitions over the last ~15 years.
Figure 1: ANN major acquisition timeline (USD)
Perry Glove
$60m
J&J Medical
$98m
Suretex
$30m
Golden Needles
$90m
Unimil
$44m
Jissbon (75%)
$18m
Sandel Medical
$14m
Hawkeye
$11m
Blowtex
$28m
7
Despite some higher profile issues with integrating the Unimil acquisition in 2007, the majority
have been well executed. Figure 2 shows that the deals have contributed positively to group ROE
and ROA over time (despite a reduction in ANN’s gearing profile).
Figure 2: ANN's ROE, ROA and gearing over time
22%
ROE*
ROA*
Gearing (ND/ND+E) %
18%
14%
10%
6%
2%
-2%
FY05(a)
FY06(a)
FY07(a)
FY08(a)
FY09(a)
FY10(a)
FY11(a)
FY12f
FY13f
Note:
*NPAT used in ROE and ROA calculation normalised to exclude deferred tax asset benefit
Project Fusion presents material upside
The significant capital investment in project Fusion is expected to: (1) standardise, simplify and
automate ANN’s business processes; and (2) enhance its ability to make decisions around
inventory management, purchasing and production planning which should ultimately lead to
material improvements in working capital.
ANN went ‘live’ with
the new IT system in
the US in July
As background, the program is to be completed over a three-year timeframe (by FY14f) at an
estimated cost of $80m. The development costs are being capitalised and expected to be
amortised over a seven-year period on completion. Discussions with management indicated that
the savings expected would “at least offset the additional P&L expense of amortisation”.
If we assume a seven-year straight-line amortisation period, this implies cost savings of at least
$11.4m pa from FY14f onwards.
We have adopted a conservative view and not factored in any expected savings into our
estimates. Any savings which eventually accrue would represent upside risk to our forecasts from
FY14f.
8
Section 2: Industrial glove M&A opportunities
Well positioned for acquisitions
The global market for industrial protective gloves is highly fragmented with a large number of
small participants, many operating in niche market segments and localised geographies.
CBA estimates the size of the global industrial protective gloves market to be ~USD4.8b–5.2b pa
with the combined share of the top five players less than 25% of the total market.
ANN is the largest player in the global industrial gloves market with ~10% share. With strong
cashflow generation and an under-geared balance sheet, we see it as well placed to pursue M&A
opportunities in a fragmented industry which we believe has significant scope for consolidation.
The industrial glove
market is fragmented
and ripe for
consolidation
Table 4: Global industrial glove manufacturers
Company
Ansell
Honeywell
Showa Best Glove
Comasec
Towa Corporation
Market share
Sales (USDm)
10.0%
5.0%
4.5%
3.0%
<3%
500
250
240
180
N/A
Who is a potential target for ANN?
The potential M&A opportunities we consider most likely to add value to ANN are companies with:
Strong, established positions in one or more markets/geographies where ANN is relatively
under-penetrated, with scope for cost rationalisation including sales, manufacturing and head
office functions. We consider Showa Best Glove, Comasec and Towa to all fit this category.
Niche specialised glove products with a unique technology or strong position in a specific
industrial sub-segment (eg mechanic gloves, fall protection) operating in localised geographies
where ANN can leverage its global sales and marketing resources to drive immediate revenue
synergies. In our view these include companies such as Hexarmor and Ergodyne.
We have conducted two M&A scenario analyses while satisfying the constraint of retaining its
investment grade credit rating:
Scenario 1: ANN acquires Showa Best Glove
Scenario 2: ANN acquires Hexarmor
Showa Best Glove – a large potential deal but worth it
Showa was formed from the acquisition of Best Manufacturing by Showa Glove of Japan in
August 2007 and continues to be a privately held company.
CBA estimates Showa’s share of the global industrial gloves market is ~4.5% with a strong skew
towards its home market in Japan where ANN does not have a material presence (ANN sells
mostly surgical gloves into Japan).
The Showa glove brand is recognised as a global leader and its manufacturing and distribution
operations significantly overlap with ANN’s own franchise. Showa’s leading brands include the NDex and ATLAS range of industrial gloves.
We see strong strategic rationale for acquiring Showa including:
We expect there are
significant revenue and
Increased market share and greater geographic and industry coverage by combining the two
cost synergies
company’s glove portfolios. ANN is significantly under-represented in the large Japanese
associated with
industrial glove market where Showa is the dominant player.
acquiring Showa
9
Cost synergies from rationalising manufacturing, SG&A, R&D and overhead expenses. We
assume savings of USD16.7m pa which we believe is conservative given the large degree of
geographic, operational and manufacturing overlap between the two companies.
Potential revenue and product synergies by extending Showa’s product range into ANN’s
portfolio, leveraging its Guardian solution selling program into the Japanese market and
consolidation of overlapping SKUs.
A combined ANN/Showa would have a global sales footprint and manufacturing facilities in the
US, Thailand, Japan, Vietnam, and Malaysia.
The potential deal makes financial sense
We have made a number of assumptions (Table 5) in deriving our EV estimate for Showa given its
status as a privately held company. Key assumptions include:
15% cumulative sales growth from 2008 to 2011 to account for a material sales drop in 2009,
followed by strong recovery in 2010 and 2011.
EBIT margin of 11.5% (300bps lower than ANN’s comparable margin in FY08).
Acquisition multiple of 14x EBIT. This compares with ~17.9x EBIT multiple paid by Honeywell
for Sperian during the peak of the post-GFC rally in May 2010.
Table 5: Showa value estimation
2008 Comment
Sales (¥m)
EBIT (¥m)
EV (¥m)
2011 Comment
¥17,300.0 Actual 2008 sales in ¥ (postmerger with Best Glove)
¥1,990.0 Assumes 11.5% EBIT
margin, (300bps lower than
ANN)
¥27,853.0 Assumes 14x acquisition
multiple
Sales (¥m)
EBIT (¥m)
EV (¥m)
↓
¥19,895.0 Assumes 15% sales growth
from 2008/09 GFC lows
¥2,287.9 Assumes 11.5% EBIT
margin (300bps lower than
ANN)
¥32,030.6 Assumes 14x acquisition
multiple
↓
Sales (USDm)
EBIT (USDm)
EV (USDm)
↓
$242.6 Converted at 82 USD/JPY
$27.8 Converted at 82 USD/JPY
$389.6 Assumes 14x EBIT multiple
Source: Showa Best Glove, CBA
Table 6 summarises the geographic locations of key operational functions. Acquiring Showa could
potentially unlock significant R&D and manufacturing synergies in addition to rationalising
purchasing, sales and head office functions.
Table 6: Ansell and Showa geographic comparison (grey = areas of overlap)
Manufacturing
R&D
Sales
Head office
Ansell
Showa Best Glove
Thailand, Malaysia, India, Sri-lanka, USA
Sri-Lanka, Malaysia, USA
US, Europe, Asia
Melbourne (AUS), New Jersey (USA)
Japan, Malaysia, Vietnam, USA
Japan, Malaysia
US, Europe, Asia
Himeji/Tokyo Japan
10
We have used ANN’s industrial segment cost structure as a proxy for Showa’s with adjustments
made for purchasing and scale efficiencies. We estimate combining the two businesses could
lead to pre-tax cost synergies of between $4.2–21m pa (Table 7).
Table 7: ANN/Showa synergy scenarios
Unlike Honeywell’s
acquisition of Sperian
(section 6), our synergy
2%
assumptions are more (USDm)
conservative
COGS
2.7
SG&A
Distribution costs
Total cost synergies
1.2
0.3
4.2
Synergy (% savings off Showa costs)
4%
6%
8%
5.4
2.3
0.6
8.3
8.2
3.5
0.9
12.5
10%
10.9
4.7
1.2
16.7
13.6
5.8
1.5
20.9
We estimate
acquisition of Showa
would be 5.9% EPS
accretive...
CBA’s sensitivity analysis suggests that acquiring Showa would be EPS accretive under a range
of scenarios (Table 8). Our base case scenario estimates that a deal would be 9.2% EPS accretive
assuming:
An acquisition multiple based on 14x FY11 EBIT, implying Showa has an EV of ~USD390m.
Cost synergies of 8% of Showa’s cost base which equates to USD16.7m pa resulting from
improved purchasing, rationalising SG&A, manufacturing, R&D and elimination of shared
overhead costs.
A maximum post-acquisition gearing level of 30% (as defined by ND/ND+E), FFO/total debt
>45% and Total debt / EBITDA <2x, which on our understanding should satisfy S&P’s
requirement for a BBB- investment grade credit rating.
Assumed equity raising of ~$45m at a 20% discount (ANN might not need new equity by
committing to an accelerated debt reduction schedule).
Acquisition or share buyback?
An alternative to acquiring Showa is to conduct a share buyback. We believe ANN could buy back
up to AUD223m of stock at $13.50ps (while remaining within its own target gearing and S&P’s
minimum credit rating metrics). We estimate this would be ~7.6% EPS accretive in the first full
year following the buyback.
Table 8 summarises the EPS accretion/dilution matrix from acquiring Showa based on various
acquisition multiples and synergy scenarios. The highlighted cells represent scenarios where the
EPS accretion from acquiring Showa is greater than the EPS accretion from conducting the share
buyback outlined above.
...the deal would also
be better than a
buyback based on our
central scenario
Table 8: EPS accretion/dilution from Showa acquisition (grey = EPS accretion > 7.6%)
2%
EBIT multiple (x)
Synergies (% captured)
4%
6%
8%
10%
10
5.6%
9.0%
12.3%
15.6%
19.0%
12
3.0%
6.3%
9.6%
13.0%
16.3%
14
-0.6%
2.7%
5.9%
9.2%
12.4%
16
-3.9%
-0.8%
2.4%
5.5%
8.7%
Niche glove suppliers – small value adds
While the majority of glove manufacturers are small scale and, in our view, of low quality, there are
a number of niche manufacturers with strong brand reputation and unique product technologies.
We think ANN is likely to target players such as Hexarmor and Ergodyne.
Such potential acquisitions should offer strong revenue synergy, allowing ANN to leverage its
global marketing, sales and distribution strength to roll out products into new markets or
underpenetrated verticals quickly.
11
This is consistent with the strategic rationale behind the recent acquisition of Sandel Medical
Industries.
Hexarmor
Hexarmor is a privately held, US-based niche developer and manufacturer of high-end protective
gloves for a wide array of industry applications.
Hexarmor’s products
would strengthen
ANN’s high end glove
offering
Hexarmor gloves utilise the patented SuperFabric® technology which enables its products to
have significantly superior cut and puncture resistance performance than products made of Kevlar
and other similar performance fibres.
Hexarmor’s products are targeted at the heavy duty industrial market and have gained a strong
reputation in industries such as auto and metal fabrication and heavy industrial applications where
strong resistance to cuts and punctures is demanded.
Figure 3: Level 5 cut resistant mechanical gloves
Figure 4: Needlestick resistant SharpsMaster II gloves
Source: Hexarmor
Source: Hexarmor
CBA estimates Hexarmor generates sales between $10-30m pa which, while small, continues to
grow strongly off a low base. Some of its larger clientele include global industrial companies such
as US Steel, Georgia Pacific, Waste Management and Weyerhaeuser.
Revenue and product synergies
We see significant potential for revenue and product development synergies from an
ANN/Hexarmor tie-up. Hexarmor’s value to ANN would primarily be in the medium- to heavy-duty
industrial glove and arm protection segment, and would give it access to a new range of highend, premium priced hand and arm protection solutions.
Our survey of a large US distributor indicated Hexarmor’s weighted average selling price across
its product portfolio was 100% higher than ANN’s.
12
Table 9: Hexarmor weighted average price per item
Table 10: ANN weighted average price per item
Low
price
High
price
Mid price
(1)
Number of products
(2)
(1) x (2)
$
Low
price
High
price
Mid price
(1)
Number of products
(2)
(1) x (2)
$
$1
$25
$50
$100
$200
$300
$400
$500
$25
$50
$100
$200
$300
$400
$500
$1,000
$13
$37.5
$75
$150
$250
$350
$450
$750
5
43
80
5
4
2
1
1
Sum (1) x (2)
Total products
Weighted price
65
1,612.5
6,000
750
1,000
700
450
750
11,327.5
141
80.3
$1
$25
$50
$100
$200
$300
$400
$500
$25
$50
$100
$200
$300
$400
$500
$1,000
$13
$37.5
$75
$150
$250
$350
$450
$750
463
65
7
45
7
0
3
7
Sum (1) x (2)
Total products
Weighted price
6,019
2,437.5
525
6,750
1,750
0
1,350
5,250
24,081.5
597
$40.3
Source: Grainger, CBA
Source: Grainger, CBA
In addition, ANN would be able to leverage its global sales and marketing capabilities to
significantly expand Hexarmor’s geographic reach, which is currently skewed to the US market.
13
Section 3: Strong Industrial glove growth drivers
ANN winning market share
We use the number of ‘pairs of hands’ employed across key industrial sub-sectors as a proxy for
industrial glove demand. These sub-sectors include: heavy machinery & equipment; metal
fabrication; chemical & pharma; oil, gas & mining; and automotive. Collectively, they, account for
82% of industrial glove demand.
Figure 5: Glove demand by industrial sector
Industrial glove usage
is spread across
several key sectors
18%
23%
12%
Machinery & Equipment
Metal Fabrication
Chemical & Pharma
Oil, Gas & Mining
Automotive
Other
17%
13%
17%
We use US Department of Labor statistics on employment in Mining, Manufacturing, and Durable
Goods, as a proxy for employment levels in industries with high industrial glove usage.
Table 11: US employment growth (Mining, Manufacturing & Durable goods) vs ANN US
revenue growth
Year
2006
2007
2008
2009
2010*
2011*
Number of employed ('000s) in the US
23,822
23,408
22,630
19,822
19,301
19,731
% change from pcp ANN US revenue growth %
0.1%
-1.7%
-3.3%
-12.4%
-2.6%
2.2%
>2%
>5%
>5%
<0%
>5%
>5%
Source: US Bureau of Labor Statistics, Company data, CBA
Note:
*Prior to 2010, ANN’s reported “Americas” revenue data included Latin America
The key observation from Table 11 is that ANN continues to grow US sales despite reductions in
absolute levels of employment or ‘pairs of hands’ across key industrial segments:
Total workers employed in the mining, manufacturing (including auto and metal fabrication)
and durable goods sectors has fallen by 17% since 2006 to 19.7m workers.
ANN’s sales growth
continues to exceed
US GDP growth
ANN’s US sales revenue has grown >5% pa with 2009 being the exception due to the GFC.
Feedback from management has indicated that pricing for industrial gloves has been relatively
stable over the last couple of years implying revenue growth has been driven primarily by
volume growth (likely implying market share gains) and positive mix shift.
Our feedback from distributors also indicated a preference for tier one suppliers with market
leading brands, a broad product portfolio and strong after sales service compared to second and
third tier suppliers.
In addition, ANN has been able to capitalise on the increasing globalisation of large end-users. As
organisations increasingly expand manufacturing bases in emerging markets, demand for gloves
from these subsidiaries should increase, driven by stricter OH&S requirements from head office.
14
OH&S to drive volume growth and mix changes
In most industrialised nations, the requirement to use appropriate personal protective equipment
(PPE), including hand protection, is a legislative requirement in occupations where employers are
likely to be exposed to potential hazards.
In emerging markets such as the BRIC countries, compulsory requirements and standards around
PPE and specifically, worker hand protection, are either only just developing or non-existent.
In the medium-term, these markets should represent a growth opportunity for ANN as OH&S
We see stricter OH&S
legislation as inevitable standards evolve and increased importance is placed on worker safety and protection.
in emerging markets
From ANN’s perspective, its relatively higher priced gloves continue to be a key barrier to growth
given cheaper, low quality gloves can be obtained for only a fraction of the cost.
We understand ANN is working on launching a ‘de-featured’ range of gloves tailored to emerging
markets which will be more price competitive.
Breakout Box: Brazil case study
In January 2010, the Brazilian government introduced the Fator Acidentário de Prevenção
(Accident Prevention Factor), essentially a form of taxation on companies based on the rates of
worker injuries recorded, and levied in the form of higher workers compensation payments to the
government.
This saw demand for personal protective equipment significantly increase. As a subset of the PPE
market, industrial safety glove demand also increased dramatically in response to the new
regulations.
While the timing of regulatory change is difficult to predict, over the medium- to longer-term we
expect the growing importance placed on worker safety and gradual transition to higher
standards of OH&S in emerging markets to drive both volume growth and mix shift towards higher
quality protective gloves.
Industrial segment financial forecasts
Our base case assumption does not include the impact of potential acquisitions. The key
A Showa acquisition
assumptions behind our FY12 industrial segment forecasts are:
would increase our
Industrial EBIT by 17%
Flat pricing
Volume growth of 6.4%, which accounts for an expected slowdown in global industrial
production growth partially offset by:
— new product launches and ongoing market share gains driven by Guardian, and
— emerging market volume growth driven by a new range of cheaper, de-featured gloves
Figure 6: Industrial segment revenue and EBIT margin forecast (USDm)
Revenue
600
EBIT Margin %
20%
450
18%
300
16%
150
14%
12%
0
FY10(a)
FY11(a)
FY12(e)
FY13(e)
FY14(e)
15
Section 4: Medical – underlying improvement masked by headwinds
The market trends driving the outlook for the medical segment in the medium-term include:
A growing and ageing population and associated increase in physician/hospital visits.
Increased demand for both exam and surgical gloves, particularly in emerging markets.
An ongoing trend away from latex gloves towards synthetics due to allergy issues (Figure 8).
Higher raw material prices, particularly natural rubber latex (NRL) and butadiene.
Figure 7: ANN medical glove sales by function %
Figure 8: ANN medical glove sales by material %
70%
90%
% surgical
% exam
% latex
60%
70%
50%
50%
40%
30%
30%
10%
Product development
remains the key to
surgical glove sales
% synthetic
In surgical gloves, we are forecasting robust volume growth over the next several years driven by:
Ongoing expansion of the Gammex product range led by synthetics, including a recently
released range of polyisoprene gloves.
Growth in emerging markets, particularly across Asia Pacific and Eastern Europe, led by the
rollout of the new Medi-Grip brand.
Brand/SKU consolidation and a move towards more consistent, global branding which should
reduce wastage and lower costs.
In exam gloves, ANN continues to face pressure driven by a combination of aggressive
competitor pricing and high raw material costs, with NRL up 48% yoy.
Despite this, management continues to remain disciplined on pricing which has led to market
share erosion over the past 12 months. We view this as a positive and would not be averse to
ANN divesting the exam glove business entirely. Our base case scenario assumes an orderly
decline in ANN’s share of the low margin exam glove business.
Breakout Box: Relationships with GPOs
ANN’s main customer groups in the Medical segment are group purchasing organisations (GPOs),
hospitals, medical centres and specialty clinics.
GPOs are ANN’s largest customers and are dominated by a small number of major players such
as Premier and Novation.
Generally speaking, ANN enters into 1-2 year fixed price contracts with GPOs which leave it
exposed to raw material price volatility such as NRL and butadiene. We understand there are no
readily available and effective mechanisms to hedge away this risk.
Over time, we expect ANN and the industry to increasingly push for price escalation clauses in the
contracts linked to commodity price fluctuations, or look to enter into shorter-term contracts
when the contracts are renegotiated.
16
Figure 9: Medical segment revenue forecast and breakdown (USDm)
450
360
Other
270
Exam
34%
Other
Other
Exam
33%
Exam
32%
Other (incl. Sandel)
Synthetic exam
PF exam
Powdered exam
180
90
Surgical
63%
Surgical
62%
FY11(a)
FY12(e)
Synthetic surgical
Surgical
62%
PF surgical
Powdered surgical
0
FY13(e)
Commodity exposure
EBIT margins in the Medical business are sensitive to fluctuations in raw material prices,
particularly NRL and synthetic substitutes such as butadiene and polyisoprene.
NRL prices are driven
mainly by weather and
demand levels
(particularly for the
auto industry)
We estimate a 1% rise in the price of NRL relative to CBA expectations reduces FY12f medical
segment EBIT by 1.7%.
Figure 10 and Figure 11 highlight the significant raw material cost headwinds faced by ANN over
the past 12-18 months. Despite this, management has been able to partially offset the impact
through a combination of price increases and operational efficiencies.
Figure 10: Bulk latex price (Wet) MYR Sen/kg
1400
Latex wet, MYR sen/kg
Figure 11: Butadiene price USD/lb
200
Financial yr avg
Butadiene USD/pound
Financial yr avg
160
1000
120
80
600
40
0
200
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
In recent weeks, NRL prices have moderated somewhat, settling at 811 MYR Sen/kg. For FY12,
we are forecasting an average price of 904 Sen/kg, a modest rise of 2% versus the FY11 average.
For further detail on the latex and medical glove markets see Appendix 2.
17
Sandel acquisition a glimpse of things to come
The acquisition of Sandel Medical on 4 July, while small, was strategically attractive for a number
of reasons. Specifically, the acquisition:
Increased ANN’s share of wallet for both hospital and surgical theatre spend and enables
bundled product offerings.
Diversifies the segment away from latex-based cost inputs.
Provides leverage to demand growth from more stringent safety regulations for both patients
and medical staff.
Provides leverage to ANN’s existing global sales and distribution infrastructure (Sandel
currently has distributors in only 10 countries).
A broader offering
should improve ANN’s
bargaining position
with GPOs
We are forecasting Sandel to achieve 18.5% compounded annual revenue growth over the next
three years.
In addition, we expect ANN will continue to actively pursue complementary acquisition
opportunities across the medical consumables space given its lower relative share of wallet in
non-glove spending compared to peers such as Cardinal and Molynlycke.
Potential adjacencies of interest could include sutures and wound care products, sharps safety
disposal systems, fluid waste management solutions and skin preparation/marking products.
Medical segment financial forecasts
The key assumptions behind our FY12 medical segment forecasts are:
Overall unit growth of 1%, with 2% growth in surgical volumes offset by flat exam volumes.
Price growth of 2% in surgical gloves and flat pricing in exam gloves.
USD10m revenue contribution from Sandel.
Figure 12: Medical segment revenue and EBIT margin forecast (USDm)
480
Revenue
14%
EBIT Margin %
360
12%
240
10%
120
8%
6%
0
FY10(a)
FY11(a)
FY12(e)
FY13(e)
FY14(e)
18
Section 5: Sexual Wellness margins back in mid-teens
We are confident that margins for the Sexual Wellness (SW) division will trend towards its major
competitors Reckitt Benckiser (RB, which owns the Durex brand), and Church and Dwight (CD,
which owns the Trojan brand) over the medium-term. Key drivers include:
The continued rollout of the successful SKYN brand.
Ongoing growth in emerging markets, particularly China, India and Brazil.
Improved effective pricing (in conjunction with new product launches).
Manufacturing and marketing efficiencies. These initiatives in particular have helped turn
around the performance of ANN’s Polish condom business, Unimil.
Excluding the $5m
latex cost headwind,
SW FY11 margins
would have been
13.4% (vs 10.9%
reported)
Figure 13: SW division operating margins
20%
15%
SSL (RB)
CD
18%
13%
11%
Figure 14: SSL and CD operating margins
11.2%
10.7%
9.7%
8.5%
9%
15.2%
16%
14%
15.2% 15.9%
13.9%
12%
7%
10%
5%
1H10(a)
2H10(a)
1H11(a)
FY09
2H11(a)
FY10
Note:
SSL margins include Scholl footwear
SKYN a star performer
As background, SKYN condoms are the first condom brand made from polyisoprene. The
condoms are latex-free, highly resilient and also enhance sensitivity.
These features have been a successful combination with SKYN sales increasing 54% in FY11.
ANN also noted that its targets for the brand are higher in FY12f and we believe should be
achievable given:
It will launch the brand in Brazil (and other countries).
ANN will continue to
benefit from the
successful SKYN
rollout.
It will rollout SKYN Large (launched in the US in March 2011) and is in the final testing stages
of two new SKYN products.
It will rollout Zero Large (ANN’s thinnest condom), released in Australia over the last year.
Combined with the launch of SYKN, this helped Australia deliver ~20% sales growth in FY11.
It will receive a full period contribution from SKYN in China (vs six months in FY11).
Figure 15: ANN’s SKYN vs RB’s Bare polyisoprene condom
Source: ANN, RB
While major competitor, RB, has also released a polyisoprene condom (BARE), we note that ANN
continues to enjoy a ‘first mover advantage’ and has moved into second position in the US
market.
19
The action is in emerging markets
ANN continues to enjoy strong growth in emerging markets such as China, Brazil and India with:
Growing awareness of sexual health and wellness issues.
Demand for international brands. A survey by China Sexology Association in 2010 revealed
that 73% of consumers in Beijing prefer foreign condoms.
An established presence in each region (with well known brands and strong distribution
relationships).
Ticking boxes in China
Figure 16 shows that ANN delivered 17.3% sales growth in China in FY11. This was well above
market growth of ~10% due to: (1) an initial contribution from SKYN; (2) strong sales of the
Jissbon range; and (3) expanded distribution in major cities Shanghai, Guangzhou and Beijing.
Figure 16: ANN’s sales growth in China vs market growth
20%
17.3%
15%
10%
10%
5%
0%
ANN
Market
“Lower tier” cities
should be a major
opportunity in Chinese
condom market
A key opportunity for Jissbon is to branch out into ‘lower tier’ cities which are developing rapidly
and embracing international consumer products. Marketing Director of RB (China), Jorge Arias,
recently stated that “delivering affordable products, seeking suitable retail partners and
distributing the products have become the three priorities to us (in lower tier Chinese cities)”.
In addition, CEO of Jissbon, James Tang, believes that the internet will be an important tool to
help enter smaller cities in China. ANN is developing its online condom business and looking to
establish its own e-commerce platform within the next 12 months.
Government the buyer in Brazil and India
With comparatively low condom usage rates in Brazil and India, both Governments are major
purchasers of condoms on behalf of the population.
ANN is well positioned to participate in Government tenders especially with RB effectively exiting
the tender market (with a strong focus on its key brands).
Tender pricing has been relatively stable with solid margins (with no packaging, sales and
marketing costs).
20
Figure 17: Tender/private label sales by half year (USDm)
16
14.6
14
12
12
9.7
10
8
6.4
6
1H10
2H10
1H11
2H11
Ongoing economic development in these emerging markets is also seeing growing demand for
ANN’s premium brands as well as lubricants, fragrances and devices. Specifically, ANN’s sales in
Brazil increased 14.8% in FY11 with its market share improving from 18% to 22%. Fragrances
also performed particularly well in India in FY11.
Not shying away from price rises
Despite the growth in polyisoprene condoms, latex remains an important raw material input in the
majority of ANN’s condoms. Consequently, with latex prices increasing and with the release of
new premium brands/products, ANN has pushed through some ‘soft’ price increases particularly
in regions where it has a strong market position (ie Australia).
Table 12 contains the recommended retail prices in Australia for a pack of LifeStyles, Chekmate,
SKYN, Zero and Zero Large condoms. Compared to the original LifeStyles condoms:
SKYN polyisoprene condoms are 69% more expensive per unit.
ZERO and Large latex condoms are 99% more expensive per unit, respectively.
ANN is pushing
through soft price
increases in select
markets
Table 12: Australian recommended retail prices on select ANN brands
Australia
RRP ($)
Pack size
Price/unit ($)
9.95
9.95
13.95
13
13
12
12
10
8
8
0.83
0.83
1.40
1.65
1.65
LifeStyles (regular)
Chekmate
SKYN
Zero
Zero Large
Source: Company data, www.condomaustralia.com, CBA
In contrast, there are 12 condoms in SKYN packs in the US and smaller price per unit increase
due primarily to the aggressive competitive dynamics. Table 13 shows that SKYN condoms are
only priced at a 2.4% premium to LifeStyle Variety condoms.
Table 13: US recommended retail prices on select ANN brands
USA
LifeStyles Thyn
LifeStyles Variety
SKYN
List price (US$)
Pack size
Price/unit (US$)
7.06
9.99
10.24
12
12
12
0.59
0.83
0.85
Source: Amazon, CBA
21
Restructuring should deliver on several fronts
In 2007, ANN acquired the Polish condom business, Unimil, essentially for its market share in
Poland (~65%) and its access into the German market.
However, Unimil was losing market share and was also struggling with ineffective marketing and
high manufacturing costs.
Following an extensive review, ANN commenced a number of strategies in FY10 including: (1)
recruiting a new management team (to assess channels and categories); (2) closing its European
manufacturing plants; and (3) pursing more efficient marketing activities. In its FY11 result,
management indicated that Unimil was now profitable and is gaining market share.
ANN is making
progress with
improving operational
efficiency of division
More broadly, ANN’s restructuring into regional GBUs is expected to deliver substantial cost
savings and efficiency improvements. We are assuming some margin improvement due to:
streamlined SKUs (possibly by 15-25%),
coordinated marketing campaigns (ie SKYN),
digital marketing strategies, and
scale economies and increased fixed cost recovery from tender contracts.
Competing with the big boys
ANN’s major competitors are RB and CD. Both are leading consumer product companies with a
strong portfolio of market leading consumer brands including:
RB: Strepsils, Finish, Nurofen, Harpic, Mortein and Dettol
CD: Arm & Hammer, Nair, OxiClean, Nair and Arrid
We estimate that 60% of ANN’s condoms are sold in supermarkets and large retail stores, 30%
are sold in specialty stores (eg pharmacies) and 10% sold to Government and charitable
agencies.
While the large players
have potential
advantages, ANN’s
recent market gain is
due mainly to
innovation with SKYN
With a diverse consumer product range, we expect RB and CD to negotiate more aggressively
with the larger supermarket/retail chains. This could mean that they receive better pricing or more
prominent store shelf space.
In addition, RB and CD are likely to spend more on marketing activities. Figure 18 shows that
RB’s media advertising spend in FY09 was broadly consistent with ANN’s total FY09 revenues.
RB also stated it would “increase investment in brand support and building” after acquiring SSL.
Figure 18: RB’s media advertising spend in FY09
RB net revenues (£m)
ANN FY09 net revenues (£m)
RD media advertising (£m)
7753
861
868
22
Potential acquisitions
will likely be heavily
contested by major
players
On a separate issue, RB and CD recently stated that they were “hungry for acquisitions”. CD’s
criterion is very similar to ANN’s and includes:
Brands with a number 1 or 2 market share position.
High growth and high margin brands.
‘Asset light’ businesses.
Businesses that can leverage off its capital base (manufacturing, logistics and purchasing).
Businesses that can deliver a sustainable competitive advantage.
On the flip side, we believe ANN’s Sexual Wellness business would potentially be attractive to a
number of global consumer product companies. The breakout box below highlights a potential
valuation based on the EBITDA multiple paid by RB for SSL in 2010.
An acquisition multiple
in line with SSL should
present significant
upside for ANN’s
business
Breakout Box: RB’s acquisition of SSL
In July 2010, consumer products giant Reckitt Benckiser (RB) made an offer to acquire Britishbased SSL group (the owner of Durex, the world’s leading condom brand) for £2.5b.
The price valued SSL at an implied historical EV/EBITDA multiple of 18.6x.
Applying the same multiple to ANN’s Sexual Wellness business would imply an enterprise value of
$500m, representing almost 30% of ANN’s total EV (Sexual Wellness contributes only 16% of
group EBIT).
That said, ANN is only part way through the turnaround of its sexual health business which
generated EBIT margins of only 10.9% in FY11. If we were to assume a successful turnaround
and ‘mid-teen’ margins, the implied EV would be closer to $600m.
Sexual Wellness financial forecasts
The key drivers in our SW earnings forecasts are:
Volume growth of 5% in FY12f and 4.7% in FY13f. This incorporates: (1) strong growth from
the rollout of SKYN in new markets; (2) increased demand in the emerging markets; and (3)
greater interest in lubricants, devices and fragrances.
Average per unit price growth of 3.5% in FY12f and 2% in FY13f. This is largely attributable to
assumed positive mix shift towards the higher priced SKYN and ZERO range of condoms.
We assume non-latex condoms will make up 20% of sales volumes by FY13f given the
positive response to the SKYN polyisoprene condoms.
Figure 19: SW segment revenues and EBIT margin
280
Revenue
14%
EBIT Margin %
210
12%
140
10%
70
8%
0
6%
FY10(a)
FY11(a)
FY12(e)
FY13(e)
FY14(e)
23
Section 6: ANN – hunter or the hunted?
Industrial protective gloves fall within a broader subset of the Personal Protective Equipment
(PPE) market. In recent years, major industrial companies such as Honeywell and 3M have built
up significant positions in the PPE market, primarily via acquisitions.
In turn, we believe that ANN could become an active acquirer in the broader PPE market or
alternatively, given its market leading glove offering, could make it an attractive target for larger,
diversified players.
PPE market overview
PPE market is large
and growing at twice
US GDP
The global PPE market is estimated at between USD25-30b pa separated into two broad
categories of protection:
Body protection – includes protective clothing, fall protection, protective gloves, safety
footwear, etc.
Head protection – includes equipment and clothing for the eyes, face, hearing and respiratory
protection.
The majority of PPE sales are currently in the Americas and Western Europe, however growth
initiatives are increasingly focused on emerging markets such as the BRIC countries. Figure 20
shows the major players in the market including leading players, US-based Honeywell and 3M.
During Honeywell’s acquisition of Sperian, it estimated that the PPE market was growing at twice
GDP. The three key drivers of the PPE market are consistent with the industrial glove market: (1)
workplace safety awareness; (2) industrial production growth; and (3) favourable regulatory
developments.
Figure 20: Major players in PPE market (by sales)
Source: Honeywell safety product presentation 2011
24
ANN as a potential takeover target
ANN is discussed as a
potential takeover
target. However, would
it sell parts of the
business?
As highlighted in Figure 20, major PPE suppliers such as 3M and MSA have little to no offering in
industrial gloves and therefore might have interest in ANN. We consider the strategic rationale to
be clear:
ANN is a market leader in industrial gloves.
There would be significant cost synergies in a potential deal (ie head office costs, sales and
marketing expenses and purchasing savings).
ANN appears reasonably priced compared to its peers. We also note that companies such as
3M and Honeywell have paid significant premiums for assets recently (eg Sperian was
acquired by Honeywell for 13.5x EBITDA in 2010).
In addition, both 3M and MSA should have the balance sheet capacity to acquire ANN. However,
we believe they would likely divest the Medical and SW divisions.
Opportunities in diversification
As a broader PPE business, ANN would likely benefit from robust market growth, potentially new
geographic market opportunities and would have the ability to spread its fixed costs over a larger
business. Table 14 shows Honeywell’s high synergy expectations from its acquisition of Sperian
in early 2010. We estimate that the USD109.3m in total synergies incorporated ~50% in cost
savings and ~50% in revenue synergies.
Table 14: Honeywell’s expected synergies on Sperian deal (USD)
Purchase price (excluding cash)
EV/EBITDA multiple (x, on initial FY10 earnings)
Initial EBITDA
1,475
10.8
136.57
Purchase price
EV/EBITDA multiple (x, post ‘run rate’ synergies)
Run rate EBITDA
1,475
6
245.83
Implied synergies
109.26
Full line PPE suppliers
could have advantages
in negotiating with
distributers
We also believe that there are defensive reasons for ANN to become a more diversified PPE
supplier. Specifically, we have concerns that distributers could preference full line product
suppliers in order to reduce costs and improve efficiency (ie managing fewer supplier
relationships).
Furthermore, full line PPE suppliers could start to make pricing decisions across their PPE range.
This could mean that full line PPE suppliers secure industrial glove volumes by discounting and
cross-subsidising them across other PPE products.
25
Guardian program
ANN’s Guardian program is a safety management and selling solution aimed at shifting the focus
from the cost of an individual glove to reducing the overall cost of worker safety for an
organisation.
It helps distinguish ANN’s products as well as reduce a client’s overall cost of worker safety
through reductions in:
lost injury time and improved worker productivity,
workers compensations insurance costs, and
potential legal fees and litigation costs from worker injury.
The program provides a number of benefits to ANN:
It builds direct relationships with its end users (otherwise managed by distributers).
It provides ANN with an opportunity to show its latest products and helps distinguish ANN’s
products from competing products.
It ensures that clients are purchasing the majority of their industrial glove needs from ANN and
provides a high retention rate post- the initial agreement.
Ultimately, we expect the Guardian program to help defend market share as well as boost
demand. In the medium-term, ANN is looking to adapt Guardian to its Medical products division
as well.
26
Section 7: Key risks
A steep and synchronised decline in global industrial production
Near-term demand for industrial gloves is correlated to the level of industrial production (IP) and
manufacturing activity throughout the broader economy.
A material slowdown in developed economy IP represents a risk for ANN. That said, we do not
expect a repeat of the type of IP collapse seen during 2008/09 which was unique in both
magnitude and speed.
Figure 21: US industrial production index (June 2007 = 100)
120
Fabicated metals
Machinery
Auto & parts
Petroleum
Chemicals
Rubber & Plastics
100
80
60
40
Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11
There is resilience in
demand for PPE,
including gloves
In addition, protective equipment is usually low on the “hit-list” of potential areas of cost
reduction. Figure 22 shows, surprisingly, that through the GFC, ANN’s average price per glove in
its Hyflex range was very resilient, suggesting to us that buyers did not always gravitate towards
cheaper, low-end, products.
Figure 22: Change in average price per pair of Hyflex glove
10.0%
Change in avg price per pair of Hyflex glove
6.0%
2.0%
-2.0%
-6.0%
-10.0%
2003
2004
2005
2006
2007
2008
2009
2010
2011
Low cost manufacturers and white label products
We do not see low cost manufacturers and white label products as a significant threat to ANN’s
market position, particularly in developed markets where regulations of glove standards and
worker safety are more stringent.
While white label
products offer
attractive margins, they
compete mainly at
lower end
Feedback from large industrial distributors suggests only limited penetration of white label gloves,
predominantly in the low end, multi-purpose categories where branding and product
differentiation is less important.
We also believe ANN has a competitive advantage with its Guardian solution selling program
which shifts the focus away from individual glove costs to a more holistic view of worker
protection costs including lost injury time, productivity and occupational health insurance costs.
27
Latex price sensitivity
A 1% increase in the average price of NRL vs CBAf lowers our FY12f NPAT by ~1.4%. The spot
price as at 3 October 2011 was 811 Sen/kg, approximately 10% below CBA forecasts.
Table 15: Natural rubber latex price forecasts
Cost assumptions
FY10(a)
FY11(a)
FY12(f)
FY13(f)
FY14(f)
Latex (MYR Sen/kg)
Growth %
600.2
27.7%
885.9
47.6%
903.7
2.0%
921.7
2.0%
940.2
2.0%
Source: CBA
For further detail on NRL, see Section 4 and Appendix 2.
28
Earnings forecasts and relative valuation
Table 16: Financial Summary (USDm)
Group summary
FY10(a)
FY11(a)
FY12(f)
FY13(f)
FY14(f)
Revenue
EBITDA
NPAT
EPS (c)
1,086.2
150.2
106.2
79.7
1,206.9
156
121.7
91.7
1,344.2
187.6
136.7
105.7
1,416.3
207.4
155.1
121.1
1,467.1
222.2
160.5
125.4
Table 17: Industrial forecasts (USDm)
Industrial
FY10(a)
FY11(a)
FY12(f)
FY13(f)
FY14(f)
144
101.6
59.5
77.4
0
14.5
397
178.1
117.7
70.9
88.6
0
16.3
471.6
205.6
131.2
79
98.8
0
18.2
532.7
227.5
138.9
83.6
102.6
0
19.3
571.9
246.3
143.9
86.7
104.3
0
19.9
601.1
65.8
16.60%
81.9
17.40%
95.7
18.00%
106
18.50%
110.2
18.30%
Hyflex
Other general purpose
Chemical & liquid handling
Single use
Hawkeye
All other
Total
Industrial EBIT
Margin %
Table 18: Medical forecasts (USDm)
Medical
Surgeons:
Powdered
Powder free
Synthetic
Exam:
Powdered
Powder free
Synthetic
Other
Sandel
Total Sales
Medical EBIT
Margin %
FY10(a)
FY11(a)
FY12(f)
FY13(f)
FY14(f)
59.6
110.5
32.7
65.1
121.7
38.2
69.5
134.9
43.8
69.6
139.4
46.5
68.8
142.2
48.7
9.5
66.2
59.1
15.2
0
352.8
8.9
60.8
53.5
11
0
359.2
9.2
63.7
57.3
11.9
10
400.2
8.9
63.7
58.3
12
12.7
411.1
8.5
64.3
57.6
11.8
14.5
416.3
46.6
13.20%
39.2
10.90%
47.7
11.90%
50
12.20%
50
12.00%
Table 19: New Vertical forecasts (USDm)
NV&AC
HHG - Retail
Chemical/Liquid Handling
Single Use
Military/First Responders
Other general purpose
All Other
Total sales
NV&AC EBIT
Margin %
FY10(a)
FY11(a)
FY12(f)
FY13(f)
FY14(f)
25.9
43
45.4
25.4
11.1
15.3
166.1
28.8
49.1
44.2
23.7
14.4
15.3
175.5
29.4
51.6
46
24.1
17.7
15.9
184.7
29.4
54.2
47.3
24.6
20.5
16.4
192.5
29.4
57
48.8
25.1
22.8
16.9
200
10.7
6.40%
2.5
1.40%
0.4
0.20%
2.8
1.40%
7.8
3.90%
29
Table 20: SH&WB forecasts (USDm)
SH&WB
FY10(a)
FY11(a)
FY12(f)
FY13(f)
FY14(f)
137.4
16.1
0
16.8
170.3
154.8
26.6
0
19.2
200.6
179.9
27.1
0
19.5
226.6
193.1
27.7
0
19.9
240.7
200.9
28.5
0
20.3
249.7
15.5
9.10%
21.9
10.90%
26
11.50%
30
12.50%
33
13.20%
Condoms:
Branded
Tenders/PL
HHG/Disposable gloves
Other (lubricants & devices)
Total Sales
SH&WB EBIT
Margin %
Table 21: Latex forecast (MYR Sen/kg)
Cost assumptions
FY10(a)
FY11(a)
FY12(f)
FY13(f)
FY14(f)
Latex (MYR Sen/kg)
Growth %
600.2
27.7%
885.9
47.6%
903.7
2.0%
921.7
2.0%
940.2
2.0%
Figure 23: ANN relative PE vs Industrials ex-financials (x)
PE Rel to Industrials ex Financials
1.30
Average
1.20
1.10
1.00
0.90
0.80
0.70
Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11
Figure 24: ANN historical PE (x)
18.00
ANN PE
Period Average
PE
-StDev
+StDev
16.00
14.00
12.00
10.00
8.00
Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11
30
Appendix 1: Company and industry background
Company overview
ANN is a global leader in protective solutions including gloves, arm protection, protective clothing
as well as sexual health. The company is organised into four Global Business Units (GBUs) –
Industrial Solutions, Medical Solutions, New Verticals and Sexual Wellness.
Figures 1a and 2a provide a breakdown of ANN’s sales and EBIT by business unit and geography.
ANN’s largest geographic regions are Europe/Middle East/Africa and North America but its fastest
growing regions are Asia Pacific and Latin America.
Figure 1a: Sales breakdown by GBU
Figure 2a: EBIT margin by GBU
18%
17%
15%
39%
14%
Industrial
Medical
New Verticals
SH&WB
12%
9%
6%
3%
0%
Industrial
Medical
30%
New
Verticals
SH&WB
Figure 3a: Sales breakdown by geography
Figure 4a: EBIT margin by geography
24%
20%
20%
35%
Asia Pac
EMEA
Latin America
North America
16%
12%
8%
4%
0%
6%
39%
Asia Pac
EMEA
Latin
America
North
America
Figure 5a shows the location of ANN’s manufacturing facilities including 18 plants and 2 condom
packaging sites. Since this figure was presented at ANN’s Asian plant tour in April 2010, it has
closed its condom manufacturing plant in Germany.
31
Figure 5a: ANN's manufacturing facilities
*German plant closed
GBU summaries
The tables below contain the key facts on ANN’s GBUs including market sizes and position.
Table 1a: Industrial Solutions GBU summary
Market size
Market growth
Market position
Demand drivers
Major channels
Core brands
USD4b
~4% per annum
#1 in fragmented market
Industrial production volumes and OH&S legislation
Machinery and equipment (23%), metal fabrication (17%), chemical/chemical engineering
and pharmaceutical (17%)
HyFlex, AlphaTec, Touch N Tuff
Table 2a: Medical Solutions GBU summary
Market size
Market growth
Market position
Demand drivers
Major channels
Core brands
USD3b
3-10% per annum
#2 with the market dominated by five manufacturers/distributers - Ansell, Molnlycke,
Cardinal, Medline and Sempermed
Population growth and ageing, better healthcare in emerging markets and a focus on
preventative care
Hospitals (43%), professional services (27%) and outpatient (13%)
Gammex, Encore, Medi-Grip, Micro-Touch and Sandel
Table 3a: New Verticals GBU summary
Market size
Market growth
Market position
Demand drivers
Major channels
Core brands
USD3.1b
~5% per annum
#5 across a range of specialty markets
Increasing safety concerns, improved aesthetics and comfort and new glove users
Food services and agriculture (39%), construction (25%) and military and first responders
(16%)
Activarmr and Projex
32
Table 4a: Sexual Wellness GBU summary
Market size
Market growth
Market position
USD1.4b
2-7% per annum
#2 in a concentrated market with Reckitt Benckisor (which owns the Durex brand) and
Church and Dwight (which owns the Trojan brand)
Population growth (especially in young demographic group), openness on the subject as well
as increased awareness of STDs
Supermarkets and large retail stores, specialty stores (ie Pharmacies) as well as Government
and charitable agencies
SKYN, LifeStyles, Manix, Jissbon and Blowtex
Demand drivers
Major channels
Core brands
ANN strategy
Under the leadership of Magnus Nicolin, ANN is setting more ambitious growth targets (>10%
EPS growth) and is pursuing a range of growth strategies including:
Driving innovation across its product/service range
Developing new channels
Leveraging its strong brands (ie HyFlex, Gammex and SKYN)
Improving the speed and agility of the organisation
Reducing its exposure to latex (~18% of ANN’s cost base)
Financial performance
ANN has delivered a three-year EPS CAGR of 11% in an environment of global macro uncertainty
and significant commodity price headwinds. Strong industrial and surgical glove sales have been
partially offset by higher raw material input prices.
Figure 6a: Sales and EBIT margin
1600
Figure 7a: Latex costs MYR Sen/kg
14%
960
1200
13%
940
800
12%
920
400
11%
900
10%
880
Sales
EBIT margin
0
FY11(a) FY12(e) FY13(e) FY14(e)
FY11(a)
FY12(e)
FY13(e)
FY14(e)
ANN has a ‘balanced’ approach to capital management with:
Dividends - ANN’s payout ratio has historically been between 30% and 35% and we expect
this to remain consistent moving forward. Dividends have been unfranked in recent years due
to the ongoing utilisation of prior year tax losses post- the separation from Pacific Dunlop.
Share buyback - with strong free cashflow generation, an under-geared balance sheet and
limited franking ability, ANN should have ample capacity to conduct ongoing capital
management via buybacks in our view. In the absence of material acquisitions, we believe
ANN could buy back $223m while retaining its investment grade credit rating.
33
Figure 8a: FCF/share
Figure 9a: Return metrics
180
20%
CFO less capex (inc Fusion)
ROE
ROA
ROIC
18%
140
16%
100
14%
12%
60
10%
20
8%
FY11(a)
FY12(e)
FY13(e)
FY14(e)
FY11(a)
FY12(e)
FY13(e)
FY14(e)
Management
Peter Barnes - Peter became Chairman in 2005. He is currently Chairman of Metcash Limited
and Samuel Smith & Son Pty Limited as well as a Director at News Corporation.
Magnus Nicolin - Magnus joined ANN as Managing Director/CEO in 2010. Prior to that, he held
senior positions at Newell Rubbermaid, Esselte, Bayer AG, Pitney Bowes and McKinsey &
Company.
Rustom Jilla - Rustom joined ANN as CFO in 2002. Prior to that, Rustom held senior finance,
M&A and product management roles at PerkinElmer Inc and The BOC Group.
34
Appendix 2: Input costs pressures to remain
Raw materials comprise the largest proportion of ANN’s total cost structure.
Natural rubber latex (NRL) is an important cost component for ANN, however this should fall over
time as it transitions towards greater use of synthetic materials (particularly for medical gloves).
CBA estimates NRL represents ~18% of ANN’s total cost base while synthetic rubber represents
~12%.
Since 2006, the proportion of products containing NRL in ANN’s medical and sexual health
businesses have fallen noticeably. This has mainly been driven by increased substitution towards
synthetic-based products due to the increased prevalence of latex allergies as a result of using
products containing natural latex, which is thought to affect up to 12% of the population.
Figure 10a: ANN cost breakdown
5%
Figure 11a: Proportion of products containing
natural latex
Natural rubber
latex COGS
18%
25%
12%
100%
Synthetic latex
COGS
60%
Other COGS
40%
2010
79%
70%
90%
83%
20%
SG&A
0%
Distribution
costs
40%
2006
80%
Source: CBA
13%12%
Industrial
segment
Medical
segment
Sexual Health
& Wellbeing
The strong growth in NRL and synthetic rubber prices over the past 18 months has put pressure
on costs and margins for the medical gloves and new verticals businesses, and condoms to a
lesser extent.
Figures 12a and 13a show that 2HFY11 average latex prices are ~42% higher to date than pcp
while average butadiene (proxy for synthetic rubber prices) prices are ~68% higher.
Figure 12a: NRL price in Sen/kg (Wet) and period
averages
1400
Latex wet, MYR sen/kg
Figure 13a: Butadiene price in USD/lb and period
averages
200
Financial yr avg
Butadiene USD/pound
Financial yr avg
160
1000
120
80
600
40
0
200
Sep-06
Sep-07
Sep-08
Source: Malaysian Rubber Board, CBA
Sep-09
Sep-10
Sep-1
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Source: Bloomberg, CBA
While ANN has pushed through some price increases to offset the impact of higher raw material
costs, there is typically a time lag given fixed price contracts (typically 12-18 months duration)
with GPOs for exam and surgical gloves taking time to roll off.
In the medium-term, CBA expects the price of NRL to remain elevated particularly given the
ongoing strong demand from China (the world’s largest rubber consumer), thereby accelerating
the transition towards synthetic materials.
35
Latex market
NRL is harvested from the “tapping” of rubber trees which can take up to seven years to mature.
Over the past decade, global production of natural rubber has increased by an average of
4.4%p.a, compared with the 4% pa consumption growth observed over the same period.
Thailand is the largest producer of natural rubber accounting for approximately one third of global
output while the top three major producers (Thailand, Indonesia and Malaysia) account for ~75%
of global production.
The strong surge in natural rubber/latex prices over the past 24 months has been due to a
combination of strong latex demand, particularly from China (which is expected to represent over
half of all new rubber demand), exacerbated by disruptions in supply as a result of heavy rains
and monsoonal weather in key plantation regions such as Thailand.
Figure 14a: Global natural rubber supply & demand
11500
NR supply ('000t)
Figure 15a: Bulk latex price Sen/kg (wet)
1,100
NR demand ('000t)
1,000
10500
Bulk Latex Sen/kg (wet)
900
800
9500
700
8500
600
500
7500
400
6500
300
2000
2002
2004
2006
2008
Source: Rubber statistics, CBA
2010
Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Source: Malaysian rubber board, CBA
We estimate NRL represents ~18% of ANN’s cost base. Latex price volatility will continue to have
an impact on ANN’s gross margins, particularly in the medical and new vertical businesses where
NRL is a key raw material input. However this is expected to decline over time as demand mix
shifts towards greater synthetic products.
CBA forecasts the outlook for latex prices will continue to remain firm, however stabilising at
lower levels compared to recent peaks, partially driven by new yielding plantations (from 2005/06
harvests onwards representing ~6% of total planted area) which are expected to come online
from mid-2012.
Medical glove market
The global market for medical gloves is estimated at $3.4b pa (PRWeb), with demand dominated
by the US and Europe. Over the next decade however, Asia is expected to become the key
growth driver as improvements in the healthcare sector and reforms take hold.
Examination gloves represent the largest product segment within the medical glove market,
primarily to aid in the prevention of microbial contamination of patients and healthcare workers.
NRL has historically been the main raw material used in exam glove manufacture, however
growing awareness of latex allergies (which is estimated to affect anywhere from 3-22% of
healthcare workers) has seen a major shift towards powder free latex and synthetic materials
(such as nitrile, neoprene and polyisoprene) being used.
The industry structure is fragmented, with a large number of manufacturers, primarily competing
on price and product innovation. Barriers to entry are low.
36
Figure 16a: ANN powdered latex vs synthetic
exam glove growth
Figure 17a: ANN powdered latex vs synthetic
surgical glove growth
14%
22%
FY07 - FY10
FY07 - FY10
18%
7%
14%
10%
0%
6%
-7%
2%
-14%
-2%
Powdered exam
compound annual
growth p.a.
Powdered surgical
compound annual
growth p.a.
Synthetic exam
compound annual
growth p.a.
Synthetic surgical
compound annual
growth p.a.
Surgical gloves represent the fastest growing product category for ANN within the medical glove
market, and are estimated to be worth ($1.4b pa). Like exam gloves, demand growth is expected
to be driven by the powder-free and synthetic glove categories.
The top 4 players in the surgical glove market are Cardinal, Ansell, MolnIycke and Medline who
have a combined global market share of >70%, while the exam glove market is dominated by
Malaysian manufacturers including Top Glove, Kossan Rubber, Supermax and Hartalega.
The surgical glove market is characterised by higher barriers to entry owing to strict FDA
regulations, sticky surgeon preferences and a high concentration of buyers (GPOs) who negotiate
on behalf of hospitals.
Sales to GPOs are typically based on 1-2 year fixed price contracts. This means manufacturers
bear input cost and commodity price risk as evidenced by margin lumpiness during periods of
excessive commodity price volatility (for natural and synthetic latex).
Figure 18a: Medical EBIT margins versus natural latex price
750
Latex price MYR Sen/kg - yr avg (LHS)
Medical EBIT margin (RHS)
15%
600
12%
450
9%
300
6%
150
3%
0
0%
FY05(a)
FY06(a)
FY07(a)
FY08(a)
FY09(a)
FY10(a)
Over the medium- to longer-term however, CBA expects sector competition will increase as
emerging market manufacturers such as Malaysia’s Top Glove and Adventa look to improve their
offering in this higher margin space.
37
Appendix 3: ANN global peer comparables
Table 5a: ANN global comparables
Company
Ansell Limited
Medical / Surgical comps
Top Glove Corp Bhd
Hartalega Holdings Bhd
Kossan Rubber Industries
Supermax Corp Bhd
Adventa Bhd
Cardinal Health Inc
Owens & Minor Inc
PSS World Medical Inc
Country
Y/E
Mean
Median
FY2
12-mth fwd
EV/EBIT (x)
FY1
FY2
12-mth fwd
EV/EBITDA (x)
FY1
FY2
June
12.47
12.82
11.27
11.95
12.03
10.66
10.38
10.43
9.38
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
USA
USA
USA
August
March
December
December
October
June
December
March
14.00
9.23
7.12
6.02
8.77
13.60
13.99
13.22
10.74
11.23
14.10
9.74
7.83
6.70
11.92
13.92
15.10
14.29
11.70
12.92
12.26
8.67
6.85
5.76
8.38
12.48
13.56
12.03
10.00
10.35
10.23
6.77
5.68
8.32
13.23
8.33
8.29
8.41
8.66
8.33
10.29
7.13
6.10
8.82
14.75
8.50
8.93
9.04
9.19
8.87
9.12
6.38
5.52
8.13
13.04
7.76
8.04
7.72
8.21
7.90
7.79
6.34
4.56
6.60
7.30
7.18
7.28
6.93
6.74
7.05
7.84
6.70
4.99
7.17
9.07
7.30
7.73
7.33
7.26
7.31
6.91
5.94
4.39
6.38
7.08
6.76
7.11
6.48
6.38
6.62
USA
USA
USA
USA
USA
USA
December
December
December
December
December
January
10.91
12.00
10.57
13.69
13.22
8.03
11.40
11.46
11.94
12.81
11.55
14.54
14.43
9.50
12.46
12.37
10.52
11.70
10.19
13.37
12.76
7.20
10.96
11.11
7.79
8.42
9.40
11.40
12.16
N/A
9.84
9.40
8.49
8.82
10.66
11.85
12.16
N/A
10.40
10.66
7.52
8.27
8.92
11.23
12.16
N/A
9.62
8.92
6.43
7.16
7.56
8.69
8.26
5.76
7.31
7.36
6.86
7.49
8.28
9.00
8.88
8.16
8.11
8.22
6.26
7.03
7.28
8.57
8.03
4.40
6.93
7.15
USA
USA
UK
Brazil
USA
UK
December
December
December
December
June
December
18.96
12.35
13.41
18.08
14.88
13.66
15.22
14.27
20.29
12.92
13.70
23.41
15.16
14.60
16.68
14.88
18.46
12.14
13.30
16.04
13.90
13.30
14.52
13.60
12.44
8.96
10.58
10.91
11.90
10.94
10.95
10.93
13.30
9.57
10.76
12.66
12.08
11.55
11.65
11.82
12.10
8.72
10.51
10.25
11.28
10.71
10.59
10.61
10.70
7.58
9.93
9.60
10.04
9.44
9.55
9.77
11.31
8.08
10.14
10.86
10.19
9.99
10.10
10.17
10.46
7.39
9.85
9.12
9.54
9.23
9.27
9.39
Mean
Median
SH&WB comps
Church & Dwight Co Inc
Johnson & Johnson
Reckitt Benckiser
Hypermarcas
Procter & Gamble
Unilever
P/E (x)
FY1
Australia
Mean
Median
Industrial Comps
Honeywell
3M
Dupont
Kimberly Clarke
Mine Safety Appliances
Lakeland Industries
12-mth fwd
Source: Company data, Bloomberg, CBA, *12-month forward multiples normalised for different Y/E dates.
38
Current recommendation definitions
CBA Institutional Equities Investment recommendations are determined by the covering analyst and reflect the analyst’s assessment of a stock’s expected total
shareholder return (TSR). TSR is calculated as the difference between the analyst’s 12-month price target and the current share price plus the forecast dividend yield.
Buy: Stocks with a Buy recommendation represent the most attractive stocks under the analyst’s coverage. They are forecast to generate significantly positive
expected total shareholder returns.
Hold: Stocks with a Hold recommendation are less attractive than stocks with a Buy recommendation. They are forecast to generate flat to slightly positive expected
total shareholder returns.
Sell: Stocks with a Sell recommendation are the least attractive stocks. They are forecast to generate flat or negative expected total shareholder returns.
Note: CBA’s previous recommendations prior to 25 January 2010 were:
Short term (over 6 months): Buy – appreciate by >10%, Accumulate – increase between 2% and 10%, Reduce – increase by less than 2% or fall by up to 5%,Sell – fall
by >5%.
Long term (24 months) Outperform (O / P) – exceed market return by >5%, Market Perform (M / P) – be in line with market return, +/-5%, Under Perform (U / P) – be
less than market return by >5%.
One year history of price target and recommendation changes
ANN
14.7
Price Target
Date
Price Target ($)
Recommendation
5/10/2011
14.60
BUY
14.2
13.7
13.2
12.7
Source:
Oct 11
Sep 11
Aug 11
Jul 11
Jun 11
May 11
Apr 11
Mar 11
Feb 11
Jan 11
Dec 10
Nov 10
Oct 10
12.2
CBA Equities, IRESS
39
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Equities: Ansell Limited Buy

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